Let me explain...
On average most people break their 5 year fixed mortgage term 3.5 to 4 years down the road.
Many financial institutions or mortgage lenders charge a penalty in order to recoup any losses for breaking that contract. There are different ways to calculate these penalties and different scenarios they would be applicable in.
With many lenders the calculation to break a fixed mortgage term is either 3 months interest or the Interest Rate Differential (IRD) and most of the time it is whichever is GREATER.
Let's take a closer look at the Interest Rate Differential. You may have been advised to wait until you are closer to the maturity date in order to break as your penalty may be smaller. PLEASE NOTE that this is not always the case. I have attached an example below for RBC's calculation for IRD for review but first consider the following explanation why it may not pay to wait:
If you decide to break your fixed mortgage term when you are closer to 3 years remaining then your existing rate with be compared to a current 3 year rate minus the discount you originally received on the rate you have now. The bigger the difference the larger your penalty. If you wait to break and you are now closer to 2 years remaining your existing rate will now be compared to a current 2 year rate (which is usually lower than a 3 year rate) minus the discount you originally received on the rate you have now. If rates have stayed the same or have gone down the difference between your original rate & the current 2 year rate will be even greater causing your penalty to be even larger. So as you can see in this scenario it would have cost more to wait to break your mortgage term.
I appreciate that these penalty calculations and explanations can be difficult to understand. Your mortgage advisor should be able to break it down so you can understand it. Please feel free to give me a call directly to clarify, discuss or explain further.
Tony Marchigiano | Mortgage Specialist - Mortgage Sales BC Region, RBC Royal Bank | Royal Bank of Canada | T. 604-505-7109