Key Variables That Tip the Mortgage Break-Even Calculation

Q: What is the minimum rate spread for breaking to be profitable?

There is no universal rule, but generally a spread of at least 0.75% to 1.00% is needed for breaking to be profitable after absorbing all fees. The higher the balance and the more months remaining in the new loan term, the more a smaller spread can be sufficient. Your AMF-certified broker can model different scenarios for your specific situation.

Q: How does the mortgage balance influence the decision?

The balance has a dual effect. On one hand, a higher balance increases the penalty (calculated on the balance). On the other, a higher balance amplifies the monthly dollar savings. On a $500,000 balance, a 0.50% spread represents $208 per month in savings, while on a $200,000 balance, the same spread represents only $83 per month.

Q: How many remaining months are needed for breaking to be worthwhile?

The more months remaining in the term, the more complex the situation. On one hand, the IRD penalty is higher with more months remaining. On the other, a longer remaining period offers more time to amortize costs. Generally, breaking a mortgage with 24 or more months remaining offers better profitability potential than breaking with 12 months remaining.

Q: Does the penalty type (3 months vs IRD) significantly change the result?

Enormously. A 3-month interest penalty (typical of variable rates) is predictable and relatively modest. An IRD penalty (typical of fixed rates) can be 3 to 10 times higher depending on the spread between the contract rate and the lender's comparison rate. This single variable can shift a break-even calculation from 12 months to 48 months.

Q: Do future rates affect my calculation?

Yes, indirectly. If you break for a new fixed rate, your savings are guaranteed for the new term. But if rates continue to fall after your break, you could have obtained a better rate by waiting. Conversely, if rates rise again, you will have done well to lock in. This is why the break-even calculation should be combined with an assessment of rate trends, which your broker can help you interpret.

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The Three Variables That Déterminé Whether Breaking Your Mortgage Is Worth It

Behind every break-even calculation lie three fundamental variables that, together, déterminé whether breaking a mortgage is a winning strategy or a costly mistake. Understanding the interaction between the mortgage balance, the rate spread, and the number of months remaining in the term is essential for any Quebec borrower considering a refinance. Each of these variables plays a different and sometimes contradictory role in the overall equation.

Variable 1: The Mortgage Balance

The mortgage balance is the foundational variable on which everything rests. It is the surface area to which your rate spread applies — the larger the surface, the greater the potential savings in absolute dollars. On a $500,000 balance, a 1% rate spread generates savings of approximately $416 per month in pure interest. On a $200,000 balance, the same spread generates only $167 per month. Paradoxically, a higher balance also increases the penalty, especially with the interest rate differential (IRD) method. The IRD penalty on a $500,000 balance can easily exceed $15,000 if the spread between the contract rate and the lender's comparison rate is significant and several years remain in the term.

Variable 2: The Rate Spread

The rate spread between your current rate and the new rate offered is the primary profitability driver. It is the most intuitive variable: the larger the spread, the more you save each month. But there is an often-overlooked subtlety. The rate spread also directly affects the IRD penalty amount for fixed rate mortgages. If rates have dropped significantly since your signing, the comparison rate used by the lender will be lower, increasing the differential and therefore the penalty. It is a paradoxical circle: the same condition (falling rates) that makes refinancing attractive is the one that increases the exit penalty.

Variable 3: The Number of Months Remaining

The number of remaining months plays a dual role in the calculation. On one hand, the more months remaining in the current term, the higher the IRD penalty because the differential is applied over a longer period. Some lenders calculate the penalty by multiplying the monthly differential by the number of remaining months. On the other hand, a greater number of remaining months provides a longer window to amortize exit costs. The optimal point generally falls between 24 and 42 remaining months — enough time to amortize costs, but not so much that the IRD penalty becomes excessive.

How the Three Variables Interact: Comparative Scenarios

Favourable scenario: $400,000 balance, 1.25% rate spread, 36 months remaining. Monthly savings of approximately $417, break-even reached in 18-22 months depending on penalty. Result: clearly profitable.
Neutral scenario: $300,000 balance, 0.75% rate spread, 24 months remaining. Monthly savings of approximately $188, break-even reached in 20-26 months. Result: marginal, depends on exact fees.
Unfavourable scenario: $200,000 balance, 0.50% rate spread, 18 months remaining. Monthly savings of approximately $83, break-even reached in 30-40 months. Result: not profitable within the current term.
Variable rate exception: $350,000 balance, 0.75% spread, 3-month penalty only. Monthly savings of $219, exit cost of approximately $6,500. Break-even of 30 months. Can be profitable if the new term is 5 years.

Using Sensitivity Analysis to Make the Right Decision

Sensitivity analysis involves varying each variable individually to see how it affects the break-even point. Ask your AMF-certified mortgage broker in Quebec to present at least three scenarios: the base scenario with current figures, a pessimistic scenario where costs are higher than expected, and an optimistic scenario where savings are greater. OSFI requires federally regulated financial institutions to clearly disclose their penalty calculation methods, which facilitates modelling these scenarios. If the break is profitable even in the pessimistic scenario, you can proceed with confidence. If it is only profitable in the optimistic scenario, caution is warranted.

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Variables That Tip the Calculation