Lower Rate with Higher Penalty OR Higher Rate with Lower Penalty?
- John Lee - Arise Mortgage
- May 1
- 2 min read
Why Choosing the Right Mortgage Matters More Than Just the Rate
When shopping for a mortgage, many borrowers focus on securing the lowest interest rate. But what happens if life throws you a curveball and you need to break your mortgage early? The penalty can be significant—sometimes wiping out all the savings you gained from that lower rate. That’s why it’s critical to look beyond the numbers and consider your future plans.
Here’s the trade-off:
Lower Rate + Higher Penalty: Saves you money on interest but could cost you heavily if you need to break the mortgage early.
Higher Rate + Lower Penalty: Offers flexibility, making it easier (and less expensive) to exit your mortgage if life changes.
So, which option is right for you? It depends on your future.
When to Choose a Mortgage with a Lower Penalty
If you expect any major life changes or simply value flexibility, a mortgage with a lower penalty could save you thousands in the long run. Here are situations where flexibility may be more important than locking in the lowest rate:
Career Changes: A promotion, relocation, or new job might require a move within a few years.
Growing Family: You may outgrow your starter home sooner than expected.
Separation or Divorce: Difficult as it is to consider, personal life changes can impact your mortgage plans.
Investment Properties: If you’re buying a rental property but may sell or refinance soon.
In these cases, the cost of breaking a mortgage early with a high penalty could far outweigh the savings from a lower rate.
Understanding Mortgage Penalties
Lenders expect you to keep your mortgage for the full term. When you break it early, they charge a penalty to recover lost interest. Penalties are typically calculated one of two ways:
Three Months’ Interest
Interest Rate Differential (IRD)
The IRD can be especially costly. It's based on the difference between your original rate and the lender’s current rate for the remaining term. If rates have dropped, penalties can skyrocket—I’ve personally seen penalties reach as high as $30,000.
Example:
You locked in a 5-year mortgage at 5%.
After 3 years, you break the mortgage.
The lender’s current 2-year rate is 3%.
You pay a penalty based on the difference—potentially tens of thousands of dollars.
That’s why the right lender, term, and mortgage structure are just as important as getting a competitive rate.
Choosing the Right Mortgage for You
If you’re confident you’ll stay put for the full term, a lower rate with a higher penalty might make sense. But if your future holds any uncertainty, it may be worth paying a slightly higher rate for more flexibility.
Questions to Ask Yourself:
How long do I plan to stay in this home?
Could my career require me to move?
Am I expecting any major life changes (marriage, kids, divorce)?
Am I comfortable risking a high penalty if plans change?
Life isn’t always predictable—but choosing the right mortgage can protect you from costly surprises.
Need Help Choosing the Right Mortgage?
Unsure which option is best for you? Let’s connect. We’ll help you weigh your options and find a mortgage that fits both your current situation and your future plans.
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