RPC

RefinancePro.club

Rates Are Falling: Is It Time to Refinance?

Action criteria for deciding if a rate drop justifies refinancing

Market action3 min readFebruary 11, 2026
Share

When mortgage rates fall, the natural instinct is to refinance and take advantage of more favourable conditions. However, the decision to break your current mortgage to refinance at a lower rate requires a rigorous break-even analysis. The prepayment penalty is the most decisive factor. For a fixed-rate mortgage, the penalty is the greater of three months' interest or the interest rate differential (IRD), calculated on the remaining balance for the remaining term. The IRD can represent thousands or even tens of thousands of dollars. For a variable-rate mortgage, the penalty is generally limited to three months' interest, making refinancing much more accessible. In Quebec, the Civil Code (articles 2761 and following of the CCQ) governs the rights of the mortgage debtor, and the Consumer Protection Act imposes disclosure obligations on lenders. The Office of the Superintendent of Financial Institutions (OSFI) regulates the qualification criteria that will apply to the new loan. An AMF-certified mortgage broker can precisely calculate your penalty, compare offers from multiple lenders, and déterminé whether the interest savings over the new term justify the costs of breaking the current contract.

Rates Are Falling: Is It Time to Refinance Your Mortgage?

A drop in mortgage rates always generates excitement among borrowers, and rightfully so. A lower rate means potentially substantial savings over the life of your mortgage. However, taking advantage of this drop by refinancing your current mortgage is not always the best decision. A break-even analysis is essential to déterminé whether the savings justify the costs.

The Break-Even Calculation

The break-even point is the moment when the interest savings generated by your new lower rate surpass the total refinancing costs. These costs include the prepayment penalty, appraisal fees, legal and notary fees in Quebec, and mortgage discharge fees. If your current mortgage is fixed-rate, the penalty will be the dominant factor in this equation.

Interest Rate Differential (IRD)
A method of calculating the prepayment penalty for fixed-rate mortgages. It represents the difference between your contract rate and the lender's current rate for a term equivalent to the remaining time, applied to the balance and multiplied by the remaining months. The IRD can be very high during periods of significant rate declines.

Decision Criteria for Refinancing

  • Rate difference: A spread of at least 0.50% to 1.00% between your current rate and the new available rate is generally needed to justify the costs of refinancing a fixed-rate mortgage.
  • Time remaining on term: The more time left, the greater the potential savings. If your renewal is less than 18 months away, waiting is often wiser.
  • Current mortgage type: A variable-rate mortgage is much cheaper to break (three months' interest) than a fixed-rate mortgage (potentially very high IRD).
  • Current lender: Some lenders calculate the IRD using the posted rate rather than the discounted rate, which significantly increases the penalty. Monoline lenders generally use the discounted rate, resulting in fairer penalties.
  • Additional objectives: If refinancing also serves to consolidate high-interest debt, fund renovations, or withdraw equity, these additional benefits may justify the costs even if the rate savings alone are insufficient.

Alternatives to a Full Refinance

Before breaking your mortgage, explore these alternatives with your AMF-certified mortgage broker. A blend-and-extend arrangement is an option where your current lender combines your existing rate with the current rate to create a blended rate, while extending your term. This approach avoids the full penalty and can offer an attractive compromise. Early renewal is another possibility, offered by some lenders in the last 90 to 120 days of the term, without significant penalty.

  1. Step 1: Obtain your penalty statement: Contact your lender to obtain a written statement of your exact prepayment penalty amount. In Quebec, the Consumer Protection Act requires lenders to provide this information upon request.
  2. Step 2: Compare available rates: Your AMF mortgage broker will compare rates from dozens of lenders to find the best offer. Remember that the lowest rate is not always a commonly preferred option; contract conditions (prepayment privileges, portability, conversion clause) also matter.
  3. Step 3: Calculate the break-even point: Add up all costs (penalty + appraisal + legal fees + discharge) and divide by the monthly savings. The result is the number of months needed to recover the costs. If this period is significantly shorter than the length of your new term, refinancing is advantageous.
  4. Step 4: Explore the blend-and-extend option: Ask your broker to check whether your current lender offers a blended rate. This option is often underutilized and can provide savings without the high costs of a full refinance.
  5. Step 5: Make an informed decision: With all the data in hand, make your decision in collaboration with your AMF broker. Document the analysis for future reference and ensure you understand all terms of the new contract before signing.

The decision to refinance is one of the most important in your mortgage journey. By working with an AMF-certified mortgage broker, you gain access to an objective analysis based on your actual numbers, not lender advertising promises. The right broker will honestly tell you whether refinancing is worthwhile or whether patience is the best strategy.

Frequently Asked Questions

How do I calculate whether refinancing is worth it after a rate drop?
First, calculate your prepayment penalty. Then estimate the monthly interest savings with the new rate and multiply by the number of months remaining on your term. If the total savings exceed the penalty plus refinancing costs (appraisal, legal fees), refinancing is financially advantageous.
What is the penalty for breaking my fixed-rate mortgage in Quebec?
The penalty is the greater of three months' interest or the interest rate differential (IRD). The IRD compares your current rate to the rate the lender can obtain for the remaining duration of your term. The larger the rate drop and the more time left on your term, the higher the IRD. Some lenders use the posted rate rather than the discounted rate for this calculation, which inflates the penalty.
Is it easier to refinance a variable-rate mortgage?
Yes, significantly. The penalty for breaking a variable-rate mortgage is almost always limited to three months' interest, which is a much more modest amount than an IRD penalty on a fixed rate. This is one of the often-overlooked advantages of the variable rate.
Can I refinance without penalty if my term is almost up?
Some lenders offer the option to refinance without penalty during the last 90 to 120 days of your term, as an early renewal. Your AMF-certified mortgage broker can negotiate a new rate with your current lender or a competitor within this window.
What additional costs should I expect when refinancing?
Beyond the penalty, budget for an appraisal fee ($400 to $600), legal and notary fees ($800 to $1,500 in Quebec), and potentially a mortgage discharge fee (approximately $250 to $400). Some lenders absorb part of these costs to attract new clients.
Can an AMF broker help me get a better rate without refinancing?
Yes. Your broker can approach your current lender with competing offers to negotiate a blend-and-extend arrangement that reduces your rate without the full penalty, or negotiate a better early renewal rate. This approach is often more cost-effective than a complete refinance.

Educational information only. This does not constitute financial advice under the Act Respecting the Distribution of Financial Products and Services (LDPSF). Consult an AMF-certified mortgage broker before making any financial decision.

Mortgage Assistant

Hello! I'm your educational mortgage assistant. Ask me questions about mortgages in Quebec and Canada.

Educational info · Not financial advice
RPC
RefinancePro.club
Mortgage Guide
© 2026 RefinancePro.club. All rights reserved.

RefinancePro.club provides estimates only. Always consult your lender for exact penalty calculations.

Compliant with Canadian personal information protection laws (PIPEDA). All data is processed in Canada.

🇨🇦Proudly Canadian