How to Know If Your Mortgage Rate Is Too High

Determining whether your mortgage rate is truly too high requires a methodical analysis that goes well beyond simply comparing it to rates advertised in bank promotions. In Quebec, financial institutions offer posted rates that often serve as a starting point for negotiation, but the rates actually offered to borrowers are typically 0.50% to 1.50% lower depending on the client's financial profile, loan amount, and loan-to-value ratio. To make a meaningful comparison, you need to compare your current contractual rate to the negotiated rates offered by lenders today, taking into account your specific profile: credit score, stable income, gross and total debt service ratios, and the amount of equity in your property.

Key Indicators for Evaluating Your Rate

• Rate spread: A differential of at least 0.50% between your current rate and the best available market rates may warrant further analysis. A spread of 1% or more represents significant potential savings on a typical mortgage balance of $300,000 to $500,000.
• Remaining term length: The more time remaining in your current term, the greater the potential savings from a lower rate, but the higher the breakage penalty will be for a fixed rate. A term with less than 18 months remaining may not justify breaking.
• Applicable penalty type: Variable-rate mortgages generally incur a three-month interest penalty, while fixed-rate mortgages use the interest rate differential (IRD) calculation, which can be considerably higher, especially in a declining rate environment.
• Current loan-to-value ratio: If your property has appreciated since purchase, your loan-to-value ratio has decreased, potentially qualifying you for better rates. A ratio below 80% also eliminates the CMHC mortgage insurance requirement.
• Contractual conditions: Check whether your current contract offers prepayment privileges, portability options, or the ability to blend-and-extend, which could be less costly alternatives to a full break.

Calculating the True Cost of Your Current Rate

To quantify the financial impact of your current rate, first calculate your monthly interest cost. On a balance of $400,000 at 5.5% amortized over 25 years, you pay approximately $2,432 per month, of which about $1,833 goes to interest in the first month. If a new rate of 4.5% were available, your monthly payment would decrease to approximately $2,218, saving $214 per month or $2,568 per year. Over the remaining 36 months of a five-year term, this represents $7,704 in gross potential savings before penalties and fees. However, it is essential to subtract the breakage penalty, legal fees ($1,000 to $2,500), appraisal fees ($350 to $500), and discharge fees ($250 to $350) to obtain the actual net savings.

The Impact of the OSFI Stress Test (B-20)

Even if market rates are significantly lower than your current rate, the Office of the Superintendent of Financial Institutions (OSFI) requires all new borrowers to qualify at the stress test rate, which is the higher of 5.25% or the contractual rate plus 2%. This stress test, commonly known as Guideline B-20, applies even at renewal if you switch lenders. This means that some borrowers who qualified when they initially obtained their loan may no longer qualify today, especially if their total debt service ratio has increased due to new debts such as car loans, lines of credit, or credit cards. This factor is critical in evaluating your situation, as it may limit your options even if breaking would be financially advantageous.

1. Gather your documents: Retrieve your current mortgage contract, your latest loan statement showing the balance and rate, and your municipal assessment notice or an estimate of your property's current market value.
2. Calculate your estimated penalty: Contact your current lender or use an online calculator to estimate the breakage penalty. For a variable rate, multiply your rate by your balance and divide by four. For a fixed rate, compare the IRD calculation to the three-month interest calculation.
3. Obtain comparative quotes: Consult an AMF-certified mortgage broker who can provide the best rates from over 30 lenders. Compare rates for the same product type and term length as your current mortgage.
4. Perform the profitability analysis: Calculate the projected monthly savings multiplied by the months remaining in the term. Subtract the penalty, legal fees, appraisal fees, and discharge fees. If the result is positive and exceeds $2,000, breaking may be justified.
5. Make an informed decision: Consider not only the financial calculation but also your personal situation: employment stability, short-term sale plans, and risk tolerance if you are considering switching to a variable rate.

Interest Rate Differential (IRD)

A penalty calculation method used for fixed-rate mortgages. The IRD compares your contractual rate to the current rate offered by your lender for a term equivalent to the remaining duration of your contract, then applies this spread to the remaining balance for each remaining month. This penalty can be substantially higher than three months' interest, particularly in a declining rate environment.