Estimate the penalty to break your mortgage in Canada (interest rate differential or 3 months of interest), then compare it with the interest you would save at a lower rate to know whether to break now or wait for your renewal.
The green area shows the interest you save each month at the new rate. Breaking pays off once it rises above the red line (penalty + fees) before your current term ends.
When you break a closed mortgage before the end of its term (refinancing, selling without porting, or switching to a lower rate), your lender charges a prepayment penalty. For most fixed-rate mortgages, it is the greater of 3 months of interest and the interest rate differential (IRD). For variable-rate mortgages, it is usually limited to 3 months of interest.
Big banks advertise high posted rates and give you a discount. When you break, they apply the same discount to today's posted rate for your remaining term. The comparison rate becomes very low, the gap with your contract rate widens, and the IRD can reach 3 to 5 times the 3-month penalty. Monoline lenders usually compare with their actual offered rates, which produces smaller penalties.
Breaking only makes sense if the interest saved before your current term would end exceeds the penalty plus switching fees. After that date you could renew at market rates anyway, so later savings do not count. Most lenders also let you renew early without penalty in the last 120 days of your term: if you are close to renewal, waiting is usually the cheapest option.
Balance of $350,000 at 4.89%, 36 months left. The bank's posted rate was 6.49% at signing (1.60% discount) and the 3-year posted rate is now 5.19%. The comparison rate is 5.19% − 1.60% = 3.59%.
At a new rate of 3.89% over 22 years, you save about $10,100 of interest in 36 months: breaking would cost more than it saves. Waiting for the renewal (or asking for a blend and extend) is the better choice.
