Many homeowners who locked into high fixed rates over the past few years are now facing an uncomfortable question: should you break your mortgage early to take advantage of today’s lower rates, or is it better to wait until renewal?
This situation comes up frequently, especially for borrowers who secured rates when interest rates were near their peak and are now watching much lower offers appear from other lenders.
Let’s walk through a realistic scenario and unpack how to think about this decision.
The situation
Imagine a homeowner with the following setup:
- Fixed-rate mortgage at 6.40%
- About 11 months remaining until renewal
- Remaining mortgage balance of roughly $400,000
- Long remaining amortization
- Mortgage held with a major bank
- Competing lender offering a fixed rate in the high 3% range, plus a cash back incentive
The lender holding the mortgage has indicated that breaking the contract early would trigger a prepayment penalty of several thousand dollars. The borrower also knows that their lender allows penalty-free renewals within six months of maturity.
The key question becomes: is it worth paying the penalty now to access the lower rate, or should they wait?
How early renewal rules actually work
Most major Canadian lenders allow borrowers to renew a fixed-rate mortgage without penalty within a specific window before maturity, often around six months. Outside that window, breaking the mortgage is considered a full contract break, and standard penalties apply.
While some borrowers hope their bank will waive the penalty to keep their business, this is uncommon when the existing rate is significantly higher than current market rates. From the lender’s perspective, a higher locked-in rate is profitable, and there is little incentive to give that up early.
In some cases, penalties may be negotiated slightly, but expecting a full waiver nearly a year before maturity is usually unrealistic.
Running the math properly
This decision always comes down to math, timing, and risk.
If the difference between the current rate and a new rate is roughly 2.5 percentage points, that can represent meaningful interest savings on a large mortgage balance. Over a full year, that savings might look substantial on paper.
However, the penalty must be subtracted from those savings. When you do that, the net benefit of breaking early is often much smaller than it first appears.
It’s also important to calculate interest savings only for the period you would actually be breaking early. If you plan to renew penalty-free in six months, the comparison should focus on the next five or six months, not a full year.
In many cases, once the math is adjusted properly, the difference between breaking early and waiting is far less dramatic.
The rate risk factor
Another piece many people overlook is rate risk.
Breaking early is essentially a bet that rates will not improve further before renewal. If rates drop again over the next several months, waiting can leave you in a stronger position with more negotiating power and no penalty.
Waiting also allows you to shop the market more aggressively once you are inside the penalty-free window, when lenders know you can move without cost.
Using competition strategically
Shopping around before renewal is still a smart move, even if you do not intend to switch immediately.
Competing offers from other banks, credit unions, or mortgage brokers can be used as leverage when negotiating with your current lender. While banks may not waive penalties far in advance, they are often more flexible once renewal approaches.
If your current lender refuses to be competitive at renewal, that is when switching lenders can make the most sense.
A note on cash back offers
Cash back incentives often sound appealing, but they should be treated with caution.
A one-time cash back amount spread over a multi-year mortgage term usually represents a very small daily benefit when compared to the interest paid over time. In many cases, a slightly better rate or more flexible terms are far more valuable than a headline cash back number.
Cash back can be useful in specific situations, but it should never outweigh the fundamentals of the mortgage itself.
So what’s the practical takeaway?
In scenarios like this, the most balanced approach is often to wait until you are within the penalty-free renewal window. This avoids unnecessary penalties, preserves flexibility, and allows you to negotiate from a stronger position.
Breaking early may produce modest short-term savings in some cases, but it also introduces risk and complexity. Waiting usually provides more certainty and often leads to better long-term outcomes.
Final thoughts
Mortgage decisions are rarely just about chasing the lowest advertised rate. Timing, penalties, flexibility, and future rate movements all matter.
Before breaking a mortgage early, it’s important to run the numbers carefully, understand the rules around early renewal, and consider how much risk you are willing to take. In many cases, patience and preparation lead to better results than acting quickly on a tempting offer.
If you’re approaching renewal and unsure how to evaluate your options, having a clear plan well in advance can make the process far less stressful and far more effective.
