A Lower Rate Versus Your Prepayment Penalty: Which Wins Depends on When You Sell
On an illustrative $500,000 mortgage, a three-quarter-point rate drop saves roughly $312 a month in interest, and it can take more than four years of those savings to pay for getting out of your current contract. Plenty of Fraser Valley homeowners who locked in at the 2023 and 2024 highs are watching rates sit well below their contract in 2026 and wondering why they haven't moved yet.
The new rate answers only half the question. The other half is how long you'll actually keep the new mortgage before you sell, move up, or refinance again. Every refinance has a breakeven point, the number of months until monthly savings cover the penalty and fees. If you leave before that month arrives, the lower rate cost you money. That one comparison should drive the decision for a family eyeing a bigger house and for an investor holding rentals alike.
Put both choices on the same mortgage
Use one example for both options. You owe $500,000 at 5.15%, and a new five-year rate of 4.40% is available. These are round illustrative numbers, not a rate quote. Choice one: refinance now. Choice two: ride your current contract to renewal.
The saving is 0.75% on $500,000, about $3,750 a year or $312 a month in interest at the start. It shrinks slowly as the balance falls.
The cost is paid up front. In BC, legal or notary fees typically run $800 to $1,500, and a new appraisal adds $300 to $500. Put about $2,000 aside for these and discharge fees. Then comes the penalty.
On a variable mortgage, the penalty is three months' interest: $500,000 × 5.15% × 3/12 = $6,438. Add $2,000 and you need $8,438 back. At $312 a month, that takes about 27 months.
On a fixed mortgage, you pay the greater of three months' interest or the interest rate differential (IRD). When rates have fallen mid-term, the IRD can run to many thousands of dollars. Say yours is $15,000. Add $2,000 and you need $17,000 back, which is about 54 months, or four and a half years.
Same mortgage, same new rate, and the breakeven doubles. Before you compare anything, get your lender's actual penalty figure in writing.
The costs that don't appear in the rate
A refinance usually starts a fresh five-year term. If you were three years into your old one, you've just committed to two extra years with a new set of penalty rules.
If your original mortgage came with a cash-back incentive, breaking it early can trigger a pro-rated clawback, which belongs in the cost column. You'll also re-qualify under the stress test, which uses the higher of your contract rate plus 2 percentage points or 5.25%. At 4.40%, you'd qualify at 6.40%, even though that's not what you pay. If the appraisal comes in low and your borrowing exceeds 80% of the value, the refinance can stall, or you may have to pay down principal to proceed.
Ask your current lender about cheaper exits too. A blend and extend averages your old rate with today's rate and avoids the full penalty, and some lenders waive fees to keep you from leaving.
Your timeline settles it
Consider a family in Abbotsford planning to move up in 18 months. They won't reach either breakeven, so refinancing now just turns savings into a penalty paid twice. An investor planning to hold for ten years clears 27 months easily and probably 54 too.
A penalty only counts as a loss if you leave before recovering it. A $10,000 penalty that saves $15,000 in interest over three years leaves you $5,000 ahead.
When the goal is consolidating credit lines charging 10% or more, or freeing up monthly cash flow for a business, you're comparing something else entirely, and those savings go into the math too.
For a straight rate refinance, write down two numbers: the months until you're likely to sell or move, and the months to breakeven. If the first is clearly larger, the lower rate wins. If it isn't, keep your current mortgage and revisit at renewal.
On an illustrative $500,000 mortgage, a three-quarter-point rate drop saves roughly $312 a month in interest, and it can take more than four years of those savings to pay for getting out of your current contract. Plenty of Fraser Valley homeowners who locked in at the 2023 and 2024 highs are watching rates sit well below their contract in 2026 and wondering why they haven't moved yet.
The new rate answers only half the question. The other half is how long you'll actually keep the new mortgage before you sell, move up, or refinance again. Every refinance has a breakeven point, the number of months until monthly savings cover the penalty and fees. If you leave before that month arrives, the lower rate cost you money. That one comparison should drive the decision for a family eyeing a bigger house and for an investor holding rentals alike.
Put both choices on the same mortgage
Use one example for both options. You owe $500,000 at 5.15%, and a new five-year rate of 4.40% is available. These are round illustrative numbers, not a rate quote. Choice one: refinance now. Choice two: ride your current contract to renewal.
The saving is 0.75% on $500,000, about $3,750 a year or $312 a month in interest at the start. It shrinks slowly as the balance falls.
The cost is paid up front. In BC, legal or notary fees typically run $800 to $1,500, and a new appraisal adds $300 to $500. Put about $2,000 aside for these and discharge fees. Then comes the penalty.
On a variable mortgage, the penalty is three months' interest: $500,000 × 5.15% × 3/12 = $6,438. Add $2,000 and you need $8,438 back. At $312 a month, that takes about 27 months.
On a fixed mortgage, you pay the greater of three months' interest or the interest rate differential (IRD). When rates have fallen mid-term, the IRD can run to many thousands of dollars. Say yours is $15,000. Add $2,000 and you need $17,000 back, which is about 54 months, or four and a half years.
Same mortgage, same new rate, and the breakeven doubles. Before you compare anything, get your lender's actual penalty figure in writing.
The costs that don't appear in the rate
A refinance usually starts a fresh five-year term. If you were three years into your old one, you've just committed to two extra years with a new set of penalty rules.
If your original mortgage came with a cash-back incentive, breaking it early can trigger a pro-rated clawback, which belongs in the cost column. You'll also re-qualify under the stress test, which uses the higher of your contract rate plus 2 percentage points or 5.25%. At 4.40%, you'd qualify at 6.40%, even though that's not what you pay. If the appraisal comes in low and your borrowing exceeds 80% of the value, the refinance can stall, or you may have to pay down principal to proceed.
Ask your current lender about cheaper exits too. A blend and extend averages your old rate with today's rate and avoids the full penalty, and some lenders waive fees to keep you from leaving.
Your timeline settles it
Consider a family in Abbotsford planning to move up in 18 months. They won't reach either breakeven, so refinancing now just turns savings into a penalty paid twice. An investor planning to hold for ten years clears 27 months easily and probably 54 too.
A penalty only counts as a loss if you leave before recovering it. A $10,000 penalty that saves $15,000 in interest over three years leaves you $5,000 ahead.
When the goal is consolidating credit lines charging 10% or more, or freeing up monthly cash flow for a business, you're comparing something else entirely, and those savings go into the math too.
For a straight rate refinance, write down two numbers: the months until you're likely to sell or move, and the months to breakeven. If the first is clearly larger, the lower rate wins. If it isn't, keep your current mortgage and revisit at renewal.
Sources
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