Mortgage Renegotiation in Today’s Market


Recently, interest rates have been at historical lows. For some mortgage borrowers whose mortgage currently carries a higher interest rate than current rates, it could be worth refinancing. However, banks are starting to make it less and less appealing for home owners to break their mortgages.

In a Globe and Mail article published on February 12, it’s mentioned that banks are now changing how they calculate the penalty they charge when a mortgage borrower breaks their mortgage. Previously, lenders and banks would charge the equivalent of three months’ interest payments, but now they’re starting to move towards what is called the interest rate differential (or IRD).

The interest rate differential is essentially the difference between your current mortgage rate (what the lender could continue earning off of your mortgage) and today’s interest rates. Essentially, it’s the amount of money a lender would lose from taking the amount of your mortgage and lending it out today at a lower interest rate. The interest rate differential penalty is usually much higher than the three months’ interest penalty.

As per the Globe and Mail’s article, it’s a good idea to get moving on refinancing your mortgage (if you plan to), before the spread between your interest rate and current rates gets larger, because the larger it gets the higher your prepayment penalty will be. Contact your mortgage holder today and ask what your penalty will be. After that, please contact First Foundation to discuss if refinancing your mortgage at a lower rate is worth it.

You can read the full Globe and Mail article here. We’d like to thank astute reader and First Foundation client Michael Mauws for bringing this article to our attention. Thanks, Michael!