Your guide to ensuring that your lending decisions don’t come back to haunt you.
Your mortgage could go bump in the night.
Changing your mortgage early or getting out of the contract completely is called breaking your mortgage. It more than often comes with a hefty price tag, and these mortgage penalties can be as scary as they sound.
These are some of the reasons you might need to consider breaking your mortgage:
- Your family situation has changed. Janine and Kevin bought a new home together, but “they” didn’t last as long as their mortgage will. Kevin suddenly needs to downscale.
- Your financial situation has changed. Kevin just won the lottery and would like to pay off his mortgage early. Like in about half an hour.
- Interest rates have dropped. In an alternate universe, interest rates drop, which could mean that a new mortgage for Kevin could lower overall costs, even factoring in penalties.
So will breaking my mortgage break the bank?
It’s bad news. Or good news. It depends.
If you have an open mortgage, then there’s no cost to breaking it. That said, almost no one has an open mortgage. Do you know anyone with an open mortgage? For closed mortgages, the formula used to determine your fee is based on whether you have a fixed-rate or variable-rate mortgage.
Either way (fixed- or variable-rate), you will have to pay. Additional costs such as administration, appraisal, and discharge fees may also apply, and if your lender offered you cash back, you might also need to repay some of that. Yup, it’s complicated.
REW Tricks of the Trade to Take the Fear out of Mortgage Penalties.
In our experience, with the proper planning and research, it may be possible to minimize (or possibly dodge some of these fees entirely).
- Pay the maximum prepayment amount possible. Lenders don’t want you to prepay your mortgage all at once (they want allllll the interest), but most will allow you to pay extra up to a specific annual limit. Pay as much as you can as soon as you can when you can if you can.
- Port your mortgage. Porting your mortgage may sound jauntily nautical, but what it means is that you can take your existing contract with all the terms and port it to another property. As your mortgage remains intact, you are not technically breaking your agreement, and you can avoid a penalty fee (sneaky).
- Blend and extend. A blend-and-extend mortgage is when you take your current mortgage rate and combine it with a new one. You're technically keeping your existing mortgage but extending the term and getting an interest rate that's somewhere between your old mortgage rate and current rates.
- Have the buyer assume your mortgage. Selling early? Your lender may allow the buyer to inherit your mortgage, and your buyer might be open to it (yes, those are some big mays, mights and maybes).