Mortgage Myth: Breaking Your Mortgage Always Costs Three Months’ Interest

A lot of people assume that if you break your mortgage early, the penalty will automatically be three months’ interest. That’s not always the case. The penalty can depend on the type of mortgage you have, your lender, and what interest rates are doing at the time.

Variable vs. Fixed Mortgage Penalties

With many variable-rate mortgages, the penalty for breaking your mortgage is generally three months’ interest.

Fixed-rate mortgages are different. If the new interest rates are lower than your current rate, your penalty is calculated using something called the Interest Rate Differential (IRD). This basically means you need to pay the difference between your interest rate and the new lower rate for the rest of the term that you have. This can sometimes mean thousands (or even tens of thousands) of dollars – I’ve even heard of penalties exceeding $82,000! If the new mortgage rates are higher, however you are only charged a 3 month interest penalty. With a fixed rate mortgage the bank is guaranteed they will earn the interest you have guaranteed them.

Before making any decisions to refinance, move, or break your mortgage early, make sure you know exactly what the penalty will be.

Every mortgage and lender can be different, and the calculation isn’t always as straightforward as people think.

Sometimes the cost of breaking your mortgage is much less than expected… and sometimes it’s much more.