Did you know that more than half of Canadian mortgage holders will break or renegotiate their mortgage before maturity? This can happen for a number of reasons, such as trying to find a better interest rate, accessing home equity for renovations, having a family expansion, needing to move for work, or your children leaving home.
One common drawback of breaking a closed mortgage in Toronto before your term ends is needing to pay a penalty. There’s a lot you can learn about ending your mortgage and when it makes the most sense, as well as how to go about the overall process.
Here we are going to dive into this topic so you can understand your options and make the right decision for your unique financial situation.
What are mortgage penalties and how are they assessed?
Mortgage penalties are commonly used to compensate lenders for the funds they’ll lose when a mortgage contract is broken early.
Depending on the type of mortgage you have, such as fixed or variable rates, you might incur different mortgage penalties. In the case of variable rates, they’ll often have a penalty of roughly three months’ interest on your loan.
Fixed mortgage rates usually carry much higher penalties than variable rates. Fixed-rate penalties are often a price that is greater than three months of interest, or what is known as an interest rate differential (IRD).
An IRD is typically calculated by comparing different interest rates related to your mortgage and calculates the overall interest fees you’ll need to pay for both rates. Because of this, it’s often difficult to break a fixed mortgage rate, as in some cases the financial penalties can outweigh any potential benefits.
If you’re unsure of what your penalties are for breaking your mortgage contract, then we recommend consulting a mortgage broker or agency or a financial advisor in order to find out.
Are there alternatives to breaking a mortgage?
If the previous section about mortgage penalties has you reconsidering breaking your contract, then you may want to consider the alternatives. Thankfully, we have a few suggestions that you can utilize as an alternative to breaking your contract.
1. Port your mortgage
If you decide to break your mortgage due to a move or change of location, you can avoid your penalties by “porting” your contract. Porting is a term used in the real estate industry to describe the process of keeping your pre-existing mortgage contract despite changing your address.
Typically, in order to port, you’ll need to both purchase a new home and sell your previous one. Moreover, you may need to requalify for your ported mortgage by completing a credit check.
2. Reduce your balance before breaking
If you’re considering breaking your contract, you could try making a few extra payments towards your remaining balance on your mortgage. This helps to minimize your overall penalty and can be particularly helpful when you have a variable rate for your mortgage. Moreover, you can set up prepays, which allow you to pay off percentages of your remaining amount in a lump sum payment to your lender.
3. Negotiate your penalties
In some instances, you may be able to reach out to and negotiate with your mortgage broker to receive a lower penalty for breaking your contract. While there’s no guarantee this might work, it’s always an avenue you can pursue when trying to reduce costs.
Potential Additional Costs
Of course, once you break your contract, you’ll need to take out a new mortgage. This is known as refinancing and can include a number of different fees and costs, such as:
- Appraisal and consultant fees
- Legal and restriction costs
- Notarized title insurance
- Discharge fees
- Reinvestment fees
In addition, most new mortgages will call for new applications, credit checks, employment verification, and more. If you’re struggling with your contract, looking to explore new options, or simply looking for clear consultation for free, then you can visit Northwood Mortgage™ & contact us online here or call us at 888-495-4825. We provide some of the best mortgage rates in the Toronto area and look forward to hearing from you.