How to Proceed if You Want to Break a 5-Year Fixed Rate Mortgage in the BC Okanagan Valley
Are you preparing to buy a home and considering a 5-year fixed rate mortgage? As someone who prefers the consistency and low risk of a fixed mortgage over a variable model, this seems to be the way to go. However, you may have heard that a number of new buyers are choosing short term (1- or 3-year fixed) options as a means to avoid paying near record-high fixed rates of 2023. The latter doesn’t sound ideal for your preferences, but it has made you curious about what you should do if you get a 5-year fixed rate mortgage today, only to find that the cost of borrowing drops significantly in the next year or two. Can you get out of a 5-year fixed mortgage in BC? Below is a straightforward breakdown of what you need to know and do.
Find Out What the Penalty Is
If you want to get out of a 5-year fixed mortgage, prepare to pay a penalty. Lenders logically include a penalty as a clause in your mortgage contract to hedge their risk. Verify exactly what this penalty is before entering into the home loan agreement. In BC (and Canada-wide) a majority of fixed-rate mortgages have a prepayment penalty that is the higher of three months’ interest or the Interest Rate Differential (IRD). Most variable-rate mortgages have no IRD penalties.
Weigh Benefit of New Terms Over Penalty
Penalties suck, but that does not mean that you can’t get out of a 5-year fixed mortgage unscathed. You can most certainly come out of it better than before. It all comes down to simple math. If the new mortgage terms (i.e. lower fixed rates) outweigh what you pay in penalties, then it makes sense. As a result, you should not proceed to break your 5-year fixed rate mortgage until you have confirmed that you can get a better rate, and that the new rate will cover what’s lost in the penalties over the duration of the 5-years. This is where a mortgage broker (who works for YOU) becomes essential.
A mortgage broker has established relationships with banks and alternative private lenders who are ready to compete for your business. Moreover, a reputable broker receives discounted “bulk” rates from banks and lenders which he/she can pass on to you. As a result, you will more than likely get the new rate you need to make breaking a current 5-year fixed mortgage make sense. Read more on the benefit of using a broker to manage the process below.
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Get a Pro to Broker the Breakup!
Have you ever had to breakup with someone? Wouldn’t it have been nice to have a pro who knows exactly what to say and do, take care of it for you? Certainly. Well, when it comes to informing a bank that you want to break your mortgage you actually have that option! A mortgage broker can “broker” the process for you. Not only do you get to avoid the uncomfortable conversation with the lending institution, your mortgage specialist will run all calculations referenced above to ensure that breaking the 5-year fixed rate mortgage is indeed the smart choice. Moreover, they will ensure that your new mortgage terms better suit your financial situation and overall goals.
If buying a home in BC, or you are already in a fixed rate mortgage and want out, contact Carloni Mortgage Brokers right away to discuss your options.
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