What Are Mortgage Refinance Penalties in Alberta?
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·Reviewed by a mortgage professional
Short answer
A refinance penalty is the cost to break your current mortgage before maturity. Variable-rate penalties are often based on three months interest, while fixed-rate penalties can be higher because of interest-rate differential calculations.
The plain-English version
The penalty matters because it can erase the benefit of a lower rate or lower payment. A refinance only makes sense when the savings or strategic benefit outweighs the cost over your expected timeline.
Break-even is the simple starting point: divide the penalty and costs by monthly savings. If the break-even period is longer than you expect to keep the mortgage, refinancing may not be worth it.
Alberta-specific considerations
- Penalty formulas are lender-specific, not Alberta-specific.
- If property values changed, appraisal results can affect the refinance structure.
- Debt consolidation or equity access may still be worthwhile even when rate savings alone are not enough.
Example scenario
A $4,000 penalty with $200/month estimated savings has a 20-month break-even before considering legal or appraisal costs. If you plan to sell in 12 months, the math may not work.
Common mistakes to avoid
- Refinancing for a lower rate without calculating penalty break-even.
- Assuming all fixed-rate penalties are small.
- Forgetting setup costs beyond the penalty.
- Comparing monthly payment only and ignoring total interest.