The decision to break your current mortgage is a big decision. There are a couple of crucial questions you need to ask yourself. Specifically, what is the cost of breaking your mortgage and the savings/benefits of breaking before the end of your 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. Mainly 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. Suppose you go back to the same lender for your replacement mortgage. In that case, some lenders may allow the penalty to be “normalized” (reduced significantly). Please note, not all lenders offer this option.
What is the penalty for breaking a mortgage in Canada?
Penalties calculation varies significantly from lender to lender. Generally, for a fixed-rate mortgage, most chartered banks and credit unions will use a process called Interest Rate Differential or IRD. The remaining years and current rate in the mortgage contract rate are 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, which results in a stiff penalty payment.
Non-institutional or “monoline” lenders only offer their mortgage products to Canadians through the Mortgage Broker Channel. They also calculate using the IRD method, but the penalties are significantly lower than institutional lenders because they do not have posted rates. The penalty is calculated based on IRD or three-month interest for a monoline lender, whichever is higher.
The above scenarios focus on fixed-rate mortgages. For a variable rate mortgage, the penalty will be calculated on three-month interest – regardless of the lender.
I believe that the only reason major financial institutions calculate their penalties in this manner is to retain you as a client. After all, you are more than a mortgage, and you are a credit card, insurance, investments, loans etc.
If you’re unsure 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 info@TheMortgageGuyNiagara.com for more information.