You may be sick of your current mortgage lender and want a better offer. Or maybe you like your lender, but you’ve ran the numbers and it breaking your mortgage seems like the best strategy for your family. Everyone has their reasons for breaking a mortgage and there’s nothing wrong with it. Every situation is different, so if you think breaking your mortgage will be helpful in the grand scheme of your financial situation, it’s worth considering. Even so, know there are ramifications to breaking your mortgage. Below are some of the penalties you are bound to run into.
Inform your lender why you are considering breaking the mortgage
There is a fine line between breaking your mortgage outright and breaking it so you can refinance with the same lender. No matter which option you choose the Canadian government states you have to pay various penalties such as an administration penalty along with appraisal, reinvestment, and pre-payment penalties among others. Ultimately, your lender may agree to minimize the penalties or even opt to pay all of the penalties themselves if you are breaking the mortgage to start a new one with them. Either way, sit down with your lender and explain your rationale; you will learn if breaking your mortgage is a good idea.
Breaking to change lenders
If you are breaking your mortgage to change lenders, your current lender probably isn’t going to be generous with lowering your penalties. For starters, you will certainly have to pay a prepayment penalty to break the contract with your current lender in addition to additional fees you must pay when setting up a new mortgage altogether. The cost of breaking your mortgage to get a ‘cheaper’ mortgage with another lender is going to depend on your current lender and your prospective new lender. The process becomes a number game at this point, and the focus is all on whether or not you can sign a new mortgage that will still save you money over the long-term despite the penalties and fees you will have to pay. If you are slated to pay more, seriously consider whether this is a good idea for you.
It may have been a few years since you closed on your mortgage – if so, you may not be familiar with Canada’s new mortgage stress test. If you are breaking your mortgage to open a new one, you’re going to have to undergo this test – which could cause you to pay more on your mortgage than now. This test inflates your qualifying interest rate to see if you can still make payments under harsh, financial situations (such as loss of employment). It’s a way for lenders to ensure they are making worthwhile investments on their end – but it could cost you more in the long-term.
Sometimes, it just makes financial sense to break your mortgage – especially if you cannot afford it. All of the penalties accrued may not be a drop in the bucket for how much you would owe on your mortgage in the coming months, so you may want to get out early if you see the writing on the wall. This is a worst-case scenario though, as you should do everything in your power to budget for your mortgage (and try refinancing – it can seriously make a difference). It’s unfortunate, but it does make sense in certain circumstances. Speak with your lender before doing anything drastic, and ensure you are making the right reason if you do indeed decide to break your mortgage.
Have questions about breaking your mortgage? Want to see if you can get pre-qualified for your dream home? Let’s chat.