If you’re a homeowner in Canada, you’ve likely encountered the term break a mortgage early in Canada at some point. But what does it mean, and more importantly, is it better?
Breaking your mortgage involves paying off your current mortgage before the agreed date, and it could be based on personal or financial grounds. The choice is not easy and carries severe financial consequences.
In this blog, we’ll explore why homeowners might choose to break a mortgage early in Canada, the potential costs involved, and alternative strategies that could help you save money. Whether you’re refinancing, relocating, or reassessing your financial goals, understanding the ins and outs of breaking a mortgage is key to making an informed decision.
Why Break Your Mortgage Early?
There are several reasons that Canadian homeowners will need to break their mortgage before completing it. Each situation is unique, but understanding these reasons might help it be a little easier to consider whether it is the best decision.
Improved Financial Situation
If your personal finances strengthen via an income boost, inheritance, or winning the lottery, for example, you might have the option of refinancing your home and discharging your responsibility ahead of time or transferring to an improved home product.
Home refinance in Canada, for example, makes homeowners access reduced rates or terms and actually save thousands of dollars in the process.
Change in Lifestyle or Location
A job transfer, relocation, or a change in family circumstances might make staying in your current mortgage less practical. Breaking your mortgage early can facilitate moving to a new property or adjusting your financial commitments accordingly.
Other Reasons to Break Your Mortgage Early in Canada
- Desire to switch from a variable to a fixed rate.
- Paying off your mortgage entirely to become debt-free.
- Accessing equity for home renovations or investments.
Breaking a Mortgage and Its Monetary Implications
Breaking your mortgage early might sound like the ideal solution to you, but it’s good to have some concept of how expensive it will be. Banks and lenders charge breakage penalties in order to reimburse lost interest as well as refinancing administrative charges.
Breakage Penalties for a Mortgage
In Canada, virtually all mortgages have prepayment penalties, which are calculated on one of two grounds:
- Interest Rate Differential (IRD): Most common penalty, the difference between your current mortgage rate and the prevailing rate, multiplied by the term of the remaining balance.
- Three Months’ Interest: A less popular option, where you pay three months’ interest as a penalty.
The actual penalty varies under your lender policies and mortgage contract. As a rule, home owners are going to be charged thousands of dollars to prepay a mortgage—sometimes the amount equivalent to two months’ worth of interest payments.
Cost-Benefit Analysis
Before prepaying your mortgage, perform a proper cost-benefit analysis. Determine if the advantages of refinancing or moving to a better rate are greater than the fees.
For example, if refinancing a mortgage in Canada today has significantly lower interest rates, the future advantages could quite possibly be greater than the fees for prepaying. It is advisable to consult a mortgage broker or a financial planner to accurately estimate your penalties and gains. Mortgage calculators are also available for comparing options.
Alternatives to Breaking a Mortgage
It is not the only option to achieve your financial goals. There are some useful alternatives which are more cost-effective:
Porting the Mortgage
The majority of Canadian lenders allow homeowners to port their existing mortgage—which is to say that they can transfer the existing terms to a new home. This is one of the means through which you can avoid paying penalties and secure good rates.
Re-negotiating Terms with the Lender
Instead of going into default on your mortgage, try to negotiate with your lender for better terms. This might involve extending your amortization period, switching from a variable to a fixed interest rate, or gaining access to flexible prepayment terms.
Seeking Legal or Financial Advice
Getting advice from a mortgage expert or financial planner will also provide you with a tailored solution that is best for your situation. They will walk you through options such as blended payments or Canadian refinancing, which might prove to be better for you than prepaying your mortgage.
Final Thoughts
Breaking your mortgage early in Canada is a major financial decision that requires careful analysis. Whether you’re looking to refinance at a lower rate, move to a new home, or access equity, understanding the implications of mortgage breakage, especially the potential penalties is critical. Thankfully, there are strategic alternatives that may better suit your financial goals without incurring steep costs.
Ready to make a smarter mortgage move?
Contact Diverse Mortgage Group today for a personalized consultation and discover how we can help you save money while achieving your financial goals.
FAQs
Q1: Is it always costly to break a mortgage early in Canada?
Mostly, yes. Penalties apply on most mortgages, typically a few months’ interest. However, the amount is determined by your conditions on your mortgage and outstanding balance.
Q2: May I exit my mortgage penalty-free?
Some do have penalty-free clauses, mostly if you’re switching between lenders or when you’re porting a house mortgage. Check your agreement or speak with your lender.
Q3: How do I determine if refinancing in Canada is suitable for me?
If the current rate of mortgages is less than what you currently have, then refinancing can pay you back in the end. You may have your choices decided for you by a mortgage broker.
Q4: What are the advantages of porting my mortgage?
Porting allows you to transfer your current mortgage terms to a different property, typically penalty-free and with favorable interest rates.
