Penalties for Breaking A Mortgage, and How to Deal With Them

In Canada, the average mortgage term is 5 years. This is the amount of time that a certain agreement is valid, and at the end of this time period conditions may be renegotiated. A lot can change in 5 years, and for some homeowners, that means their current mortgage is no longer in line with their financial goals. If you find yourself in this situation, you may be considering breaking your mortgage before the term is up. We strongly recommend assessing your options before making that decision, as it could end up costing you tens of thousands in the long run.

What You Have to Gain

In some cases, breaking your mortgage can be advantageous. You may be in a position where doing so will actually save you money and put you in a better financial position. Some examples of reasons why homeowners may consider breaking their mortgage contract are:

• Selling their home.
• Taking advantage of low-interest rates by refinancing.
• Paying off the mortgage entirely, earlier than agreed upon.
• Removing a name from the title of the property and mortgage.
• Their financial situation has changed.

What You Have to Lose

No matter how low the interest rates are, breaking your mortgage results does cost a fair penny. Aside from administration, appraisal, prepayment, and reinvestment fees, the breakage penalties alone can throw a massive wrench into your perfect plans. These penalties are based on your lender, mortgage agreement, and the length of time left in your mortgage term. Generally, variable-rate mortgages require up to 3 months of interest payments to get you out of your contract. Fixed-rate mortgages, which most Canadian homeowners have, often require the greater of 3 months interest or interest rate differential.

Weighing Your Options

Calculate out exactly how much money you stand to lose and how much you stand to gain by breaking your mortgage. If the losses are too much to be worth, consider these alternatives:

• Blend & Extend. In some cases, lenders will allow you to mix your current interest rate with the current one, effectively extending your mortgage.
• Porting. In cases where you have to break your mortgage because you’re selling your home, speak with your mortgage broker or lender about the possibility of moving your current mortgage to the new property.
• Assuming. The opposite of porting, assuming allows the people purchasing your home to assume your mortgage. Again, speak with your mortgage broker or lender to see if this is an option.

Breaking your mortgage is a big decision, don’t rush into it just because you want to take advantage of low-interest rates or get rid of your home right away. Our experts at Source Mortgage can help you calculate and determine viable options for your unique situation. Send us a message today and let’s get started!