Breaking Your Mortgage in 2022
In our previous blog from 2020 on Breaking Your Mortgage, Vancouver’s Top Mortgage Broker talked about how 6 out of 10 consumers will break their mortgage within the first 3 years of a 5-year term. That means that 60% of borrowers will break a 5-year term mortgage before it’s due. With the increase of individuals breaking their mortgages, we thought it would be beneficial for you to understand the full extent of updated implications that may happen if you choose to do so.
The current conditions of your mortgage contract may no longer meet your needs. If you want to make changes before the end of your term, you can break your mortgage contract. Outside of the pandemic, people need to break a mortgage for a variety of reasons.
Some of the most common reasons for Breaking Your Mortgage include:
- Sale and purchase of a new home (without a portable mortgage)
- To take equity out/refinance
- Relationship changes (ex. Divorce)
- Health Challenges or life/job circumstances have altered
- Interest rates have decreased
When interest rates fall, it may be tempting to break your existing mortgage and renegotiate a new one at a lower interest rate. Before you start the process of Breaking Your Mortgage, consider the pros and cons:
- you get a lower interest rate
- you may be able to pay off your mortgage faster if you keep your payments the same
- you can lock in the lower interest rate for the new term of the mortgage
- you could end up paying more in the long run because of fees and a prepayment penalty
- you may no longer qualify for a mortgage under the current economic conditions
The cost of Breaking Your Mortgage contract depends on whether your mortgage is open or closed. An open mortgage allows you to break the contract without paying a prepayment penalty. If you break your closed mortgage contract, you normally must pay a prepayment penalty. This could potentially cost you thousands of dollars.
Before committing to breaking your mortgage contract, find out if you must pay:
- Prepayment penalty and, if so, how much it will cost
- Administration fees
- Appraisal fees
- Re-investment fees
- Mortgage discharge fee to remove a charge on your current mortgage and register a new one
Unfortunately, trying to figure out what you’ll be charged for breaking a fixed-rate mortgage is very difficult and often leads to accidentally miscalculating the cost of their penalty. We recommend that if you have a fixed-rate mortgage and you need to break your contract, you speak with your lender or mortgage broker directly.
The penalty you’ll be charged for breaking a variable-rate mortgage is both significantly lower and easier to calculate. Unlike a fixed-rate mortgage, your penalty fee will always amount to 3-months’ worth of interest. Keep in mind though that all mortgage lenders calculate their penalties with their own equations, so while you can expect to pay 3-month interest, you should also expect some variation in cost.
Your prepayment penalty will be the higher of these two prepayment penalty fee calculations when Breaking Your Mortgage:
- Interest Rate Differential (IRD) – The IRD compensates your lender for the interest they are losing out on because you’re breaking your mortgage early. This is calculated by finding the difference between the amount of interest you’d be paying on your current term for both rates. However, it is important to note that Interest rates fluctuate; therefore, the interest rate you were given when you signed your mortgage contract may not be the same as the interest rate your lender could charge now.
- 3 Months Interest – As the name explains, this prepayment penalty fee is based on the amount of interest you’d pay in 3-months.