What Really Happens When You Break Your Mortgage Early?

Tuesday Feb 25th, 2020


If you end your mortgage early, you may get hit with a hefty fee known as a prepayment penalty. While it is hard to fathom why anyone would want to pay this fee, the reality is that breaking a mortgage is very common. Many Canadians break their mortgage because they want to move out to a bigger house, take advantage of lower rates, or because of unexpected changes in their lives such as losing a job, going through a divorce, or having to relocate. According to RateSpy.com, it’s believed that only a little over half of borrowers with a five year mortgage actually make it to the end of their term.

Here’s what you need to be prepared for if you’re seriously considering breaking your mortgage.

Not everyone pays a penalty

After discussions with lenders, RateSpy.com learned that only 15 to 20 percent of borrowers actually paid a penalty when they broke their mortgage. The prepayment penalty can often be avoided if you refinance with your existing bank instead of switching to another lender. You can also have the penalty waived if your port your mortgage, which means transferring your existing rate and terms to your new property. Sticking with your current lender can save you from paying the penalty, but the downside is that if you’re looking for a lower rate or better terms, you may not get a sweeter deal than the one you already have.

The penalty could be huge

How much you pay depends on a number of factors, such as whether you have a variable or fixed-rate mortgage, and whether you’re with a traditional bank or alternative lender. Different providers calculate their payment charges differently, but typically this is how penalties are calculated at most major banks.

  • If you have a variable-rate mortgage, your penalty will be equivalent to three months of interest. All you have to do is calculate how much interest you’d owe on your next three mortgage payments combined and pay that sum.
  • If you have a fixed-rate mortgage, you will have to pay the greater of the sum of three months of interest or the interest rate differential (IRD). The IRD is an interest rate calculated by taking the difference between you original rate and the current rate and multiplying it by how many years you have left on your term. Depending on your remaining balance, breaking fixed-rate mortgage could cost you tens of thousands of dollars compared to variable-rate mortgages. This is something to keep in mind when shopping around for your next mortgage. In addition, you may also have to pay other fees on top of the prepayment penalty. This could include an administration fee, an appraisal fee, and a reinvestment fee.

“Only a little over half of borrowers with a five-year mortgage actually make it to the end of their term.”

Figure out whether it’s worth it to break your mortgage

Despite the penalty, there are scenarios in which breaking a mortgage makes sense financially. It’s worth it if you can get a lower rate that will significantly reduce your monthly payments, making your total savings greater than the sum of all the fees. However, ending your term early may not be the best call if the fees are so high that you don’t stand to save any money in the long run. It’s important to sit down and do the math before you make your decision and to contact a mortgage professional of you need extra help.

This information should not be relied on as legal advice, financial advice or a definitive statement of the law in any jurisdiction. For such advice, please consult your own legal counsel or financial representative.

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