Unhappy with your current lender's service or rates and wondering if you should switch mid-term? This guide helps you do the math to determine whether paying the penalty is worth it for a better rate elsewhere.
Why Would You Break Your Mortgage?
Common reasons to consider switching:
Rate arbitrage:
Current rates are significantly lower than your existing rate.
Better terms:
Your lender has restrictive prepayment options or policies.
Service issues:
Poor customer service or difficulty making changes.
Refinancing needs:
You need to access equity but your lender won't allow it.
Life changes:
Divorce, debt consolidation, or other circumstances require a new mortgage.
Understanding Your Penalty
Before anything else, find out your exact penalty.
Variable rate mortgage:
Typically 3 months' interest. Relatively predictable.
Example: $400,000 × 5% × 3/12 = $5,000
Fixed rate mortgage:
Greater of 3 months' interest OR Interest Rate Differential (IRD).
IRD depends on:
- Your current rate vs today's rate
- How much time remains in your term
- How your lender calculates comparison rates
Fixed penalties can range from a few thousand to $20,000+.
See our early renewal guide for detailed IRD calculations.
The Break-Even Calculation
Step 1: Get your exact penalty from your lender (in writing)
Step 2: Calculate monthly savings with new rate
Step 3: Divide penalty by monthly savings = months to break even
Step 4: Compare to remaining term
Example:
- Penalty: $8,000
- Monthly savings: $150
- Break-even: 53 months
- Remaining term: 36 months
In this case, switching doesn't make sense—you won't recoup the penalty before term end.
When Switching Usually Makes Sense
✓ Variable rate with 3-month penalty
Low penalties make switching easier to justify.
✓ Large rate differential (1%+)
Bigger savings means faster break-even.
✓ Long time remaining (3+ years)
More time to recoup penalty costs.
✓ Poor existing terms
If your current mortgage is restrictive, switching has value beyond rate.
When Switching Usually Doesn't Make Sense
✗ Less than 1 year remaining
Just wait for renewal.
✗ High fixed-rate penalty
IRD penalties can be prohibitive.
✗ Small rate difference (<0.25%)
Savings may not justify hassle and costs.
✗ Plans to sell soon
You'd pay the penalty anyway.
Hidden Costs to Consider
Beyond the penalty:
Legal fees: $800-1,500 for new mortgage registration
Appraisal fee: $300-500 if required
Discharge fee: $200-350 to remove old mortgage
Time and effort: Not a cost, but a consideration
Alternative: Blend and Extend
Instead of breaking and paying full penalty:
Your current lender may offer to:
- Blend your old rate with current rates
- Extend your term
- Avoid the full penalty
This isn't always the best deal, but it's worth exploring. Read our blended rate guide.
Questions to Ask Before Switching
- What is my exact penalty (in writing)?
- What rate can I get with a new lender?
- What are all the costs involved?
- How long until I break even?
- Will I stay in this home that long?
FAQ
Q: Can I negotiate my penalty down?
A: Rarely with banks, but some lenders offer switching incentives that effectively offset penalties.
Q: Is the penalty tax-deductible?
A: Not for your principal residence. Consult an accountant for rental properties.
Q: What if I switch to a lender with cash back?
A: Cash back can offset penalties, but these mortgages often have higher rates. Do the full math.
Q: Can I switch lenders and also refinance?
A: Yes, you can combine switching with equity access. This is often called a refinance.
Q: How long does switching take?
A: Typically 2-4 weeks once you've decided. Start well before your desired switch date.
What's Next
Switching lenders mid-term can save money, but only with careful calculation. Avoid the common renewal mistakes when your term does end—that's the perfect time to switch without penalties.
Ready to Get Started?
Contact us today for personalized mortgage advice and competitive rates.
