How does this affect a borrower: It is important to understand how breaking a mortgage can affect you based on your lender, because it can vary in cost and types of penalties. 7 out of 10 people break their mortgage, so you are likely to break yours at some point in your life, which is why this subject is so important. In this blog, we discuss reasons for breaking a mortgage, consequences of breaking a mortgage, and the benefits you could receive.
Breaking a Mortgage: Is it a Good Thing?
Last week, we discussed prepayment plans, what they are and how they can benefit you. The prepayment plans are an important part of the personality of the mortgage and should be a factor to consider. Rates are not everything and understanding the entire contract with a lender is crucial.
Today, we are going to talk about another area to consider when selecting a lender for your mortgage. The area we are going to talk about is breaking a mortgage.
Why Break a Mortgage?
Breaking a Mortgage can be for a variety of reasons that are in the best interest of the consumer. Main reasons for breaking a mortgage are because you want to upgrade, refinance, or sell your home. The reasons for this could be numerous, such as:
- Interest rates have gone down
- Your financial situation has changed
- You want to buy a new home and are planning on moving
- Your family situation has changed
- Your home no longer meets your needs
There are many reasons to break your mortgage and it can be beneficial, but it is important to read your contract to understand what consequences that could arise due to breaking your mortgage.
Consequences of Breaking a Mortgage
If you have an open mortgage, then your concerns are minimal as you are allowed to break the contract without paying a prepayment penalty.
If you have a closed mortgage contract, you normally will have to pay a prepayment penalty. This penalty could cost thousands of dollars and on top of this, you may have to pay other fees such as;
- Administration fees
- Appraisal fees
- Reinvestment fees
- A mortgage discharge fee to remove a charge on your current mortgage and register a new one
- You may have to repay any cash back you received when you got your mortgage.
Variable and Fixed rate mortgages usually bring different types of penalties. Typically, with a variable rate mortgage (one that moves up and down with the Bank of Canada), you could incur a 3 month interest penalty.
With a fixed rate mortgage (a set rate that is a little higher than a variable rate mortgage) incurs a penalty of the interest accumulated for the remainder of the term. For example, if you decide to sell your house in year 2 of the 5 year term, you will have to pay 3 years of interest to get out of the mortgage (very pricey). This rate could be based on your fixed rate or the Bank of Canada benchmark rate.
It is important to understand that those are the norms we notice, but are different from lender to lender.
There are a lot of fees involved with breaking a mortgage depending on your lender and mortgage contract, but it is important to understand the long-term picture, as breaking your mortgage contract can be an overall good idea. It also is not uncommon, with statistically, 70% of mortgages being broken before the term expires (usually 5 years).
Why Break a Mortgage
Breaking a mortgage can be a good thing. If you are going to get a better rate that will save you money in the long run, then it can be a great thing.
Another thing to consider is your consumer debt. Almost all other forms of debt carry much higher interest rates. If you are breaking your mortgage to pay off those higher forms of debt, then even a higher mortgage rate would still save you a lot of money in the future. This is why it is important to not just consider the mortgage rate, but to consider your entire financial situation.
Stay tuned for our next blog, where we will discuss porting a mortgage and how it can help you prevent the breakage of a mortgage.
We at GLM Mortgage Group have dealt with a lot of different situations that required breaking your mortgage. We know it can be a complicated matter, which is why we want to help! We are available at any time and will get back to you within 90 minutes guaranteed. Visit our website for our contact information.