Should you break your mortgage early?

Wednesday, July 1, 2015 @ 12:16 AM
Posted By: Patty Bevan

The term "breaking your mortgage" seems to have a negative connotation to it, but it's not necessarily a bad thing, for you or your lender. The main reason a homeowner might choose to break their mortgage is to get a lower rate with another lending institution. When the Investor's Group cut its three-year variable mortgage rate to 1.99 per cent last month, some homeowners were scratching their heads, wondering if breaking their mortgages and switching would be a prudent decision. After all, wouldn't the long-term savings outweigh the initial penalties? It's possible. The key factor to consider before breaking your current mortgage is the penalty you will incur. The amount of this penalty depends on the type of mortgage you have and which lending institution you're with. Finding out the amount you will be on the hook for is easy and doesn't even require a phone call. You can find handy mortgage penalty calculators online, like the one at Ratehub.ca. Simply enter in your remaining mortgage balance, the type of mortgage, your existing rate and the original term and, voila! There's your penalty amount. Just to give you an idea; breaking a $200,000 mortgage with TD Canada Trust and a fixed rate of 2.99 percent would incur a penalty of $9,796. With a fixed rate mortgage, the penalty is calculated using something called "interest rate differential calculation." The penalties are a bit different if you have a variable rate mortgage or a cash-back mortgage - check with your lender for details and be sure to read the fine print. Some lower rate mortgages may have a stipulation that the mortgage cannot be broken unless you sell your home. After you've determine your penalty, it's just a matter of working out if the interest savings will be greater than the penalty paid. If the offered rate is more than two per cent less than your current rate, it might be worth paying the penalty and switching.

Category: Real Estate

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