Is it Worth it to Break Your Mortgage?
Your mortgage is a huge investment. There are a lot of things to consider when you’re going through the mortgage application process. Life is full of changes and sometimes breaking your mortgage is an option you’re considering. Breaking a mortgage is something many people consider at some point in life.
When breaking a mortgage you will, unfortunately, need to pay the mortgage lender a fee called a prepayment penalty. The amount of the prepayment penalty will vary depending on many factors such as the day you signed the mortgage papers, your remaining term, the remaining balance of the mortgage, the rate type, and your mortgage rate.
You will need to take into account whether your mortgage is variable or a fixed rate. A fixed mortgage rate holder will pay a higher interest rate differential or three months interest. Those with variable rate mortgages will pay just three months interest.
Thinking about breaking your mortgage? You’ll want to work with your mortgage broker and do the math. Are the savings you receive from breaking your mortgage worth the prepayment penalty you’ll need to pay out? Often, the math is really clear and it’s either worth it or not. Mortgage rates will fluctuate over time and reworking your mortgage when fixed-rate mortgages are low could make sense for a lot of homeowners. The prepayment penalty is an expense that needs to be accounted for when thinking about selling a property.
An experienced mortgage broker will work with you to understand your goals and will break down the numbers in a way that makes sense to you. There are various reasons why people consider breaking their mortgage, some of the most common include reducing the total cost of their mortgage, the ability to consolidate other debt such as credit card or car loans into their mortgage and many people are simply looking to reduce their monthly payment. It’s important to communicate the reason behind you breaking your mortgage with your mortgage broker.
There are generally no rules that will stop you from breaking your mortgage, it’s actually a really common thing people do. Your mortgage papers were full of fine print and if you’re like most people you probably didn’t read everything. Within that fine print, you agreed that you would be subject to a penalty fee if you exit the mortgage contract before the agreed term expires. Most mortgage terms are one, three, or five years in length.
Lenders earn their money by the interest you pay on your mortgage. When you exit the contract early the lender will earn less interest than they planned when you signed the papers. The prepayment penalty is a way to recoup some of this money. The reality is; sometimes the amount you need to pay to break your mortgage will make it too expensive to exit.
Refinancing or breaking a mortgage causes other expenses that you’ll want to consider. Getting a new mortgage requires some work and some upfront expenses. You will need to go through a credit check and complete a mortgage application in order to get your new mortgage. It’s possible that you may need to do a title search, an appraisal or need to pay for a home inspection. These fees can quickly add up. If you are planning to sell your home in the next few years, it’s probably not worthwhile to exit your mortgage.
Many Toronto homeowners will benefit greatly by breaking their current mortgage, potentially saving them thousands of dollars. Even after the penalty fees are paid they can still profit a noticeable amount.
Like all things in life, it’s sometimes best to shop around for a mortgage that makes sense for you and your financial situation. A mortgage broker is a great option for anyone thinking about breaking a mortgage. They are professionals trained to get the best mortgage deals on your behalf, with contact with mortgage lenders across the country.
At Tanner Financial, we’ve been helping people like you find the best mortgage options since we opened our doors in 1999. We are not employed by any financial institution, therefore we only have your best interest in mind when finding your mortgage. Thinking about breaking your mortgage? Talk to one of our experienced Toronto and GTA mortgage advisors to learn your options.