The decision to break your current mortgage is a big decision. There are a couple of key questions you need to ask yourself. Specifically, what is the cost to break your mortgage and what are the savings/benefits of breaking before the end of the current contract expiry. Here are some items to consider before you pull the plug.
When should you break your mortgage?
The ideal time to break your current mortgage is when your current rate is significantly higher than the current competitive rates. This is particularly important if you want to switch to a new lender to get in on a great product at a great rate. Check out our blog on switching mortgage lenders.
You might also need to break your mortgage if you have an urgent need to refinance to eliminate high interest-bearing items like credit cards.
How can I get out my mortgage without penalty?
The only time you can get out of your mortgage without a penalty is at the end of your current mortgage term. If you go back to the same lender for your replacement mortgage, some lenders may allow the penalty to be “normalized” (reduced significantly). It should be noted that not all lenders offer this option.
What is the penalty to break mortgage in Canada?
Penalties are calculated in a couple of ways. For a fixed rate mortgage, most chartered banks and credit unions will use a process called Interest Rate Differential or IRD. This is based on the remaining years in the current mortgage contract compared to the current POSTED rate for the same term. Most posted rates are significantly higher than the DISCOUNTED rate you obtained when you signed up for your current mortgage contract. This results in a stiff penalty payment.
Non-institutional lenders or “monoline” lenders only offer their mortgage products to Canadians through the Mortgage Broker Channel. They also calculate using the IRD method but because they do not have posted rates, the penalties are significantly lower than institutional lenders. For a monoline lender, the penalty will be based on IRD or three-months interest whichever is higher.
The above scenarios are based on a fixed rate mortgage. For a variable rate mortgage, the penalty will be calculated on three-months interest – regardless of the lender.
It is my opinion that the only reason major financial institutions calculate their penalties in this manner is to retain you as a client. Afterall, you are more than a mortgage. You are a credit card, insurance, investments, loans etc.…
If you’re not sure if this is the right option for you, let’s connect for a no obligation quick chat to run through your current situation. Or you can email us at [email protected] for more information.