• Breaking a Mortgage Contract

    August 20, 2019
  • Getting a mortgage is a big commitment for any homeowner and it can be tough to find the right mortgage for your current situation. But it’s even harder to predict what your needs will be years down the line. When things change, sometimes your mortgage needs to change as well, which is why it’s important to know your options when breaking a mortgage contract.

    Why break your mortgage contract?

    There are many reasons to consider renegotiating your mortgage. One of the most common reasons homeowners break their mortgage is a change in finances, but other factors can also play a role. These can include:

    • A change in your family income
    • New assets, such as an inheritance
    • New expenses, such as tuition or the cost of a new vehicle
    • Decreased interest rates since signing your mortgage contract
    • Planning to buy a new home and relocate

    If you’ve decided to renegotiate and get a new mortgage, you’ll need to complete a mortgage stress test. This is to prove that you’re able to afford your new interest rate.

    Pros and cons of breaking your mortgage

    There are sometimes significant costs in breaking a mortgage. It’s important to have a thorough understanding of the terms of your contract, so that if things change, you’re aware of your options. If you’re unsure, speaking to your current lender about your course of action is a good first step. And while there are usually fees associated, the benefits of breaking a mortgage can sometimes outweigh the costs.

    Some of the benefits of renegotiating can include:

    • Pay a lower interest rate, saving money going forward
    • Possibility of paying your mortgage off faster
    • Secure a lower interest rate for the new term of your contract

    Possible downsides of breaking your mortgage include:

    • If you’re planning on selling your property, you may not get the savings of a lower interest rate
    • Possibly pay more in the long-run due to prepayment penalties.

    Although breaking your mortgage contract isn’t always the right choice, in some cases it makes the most sense for homeowners to renegotiate. By speaking with a qualified mortgage broker about your current contract, financial situation, and long-term plans for your property, you can build a plan to get the right mortgage rate for you.

    If you’ve decided to break your mortgage contract, there are two options in securing a new rate.

    Option 1: Renegotiating with your current lender

    Depending on the institution you have signed with, you may be able to extend your mortgage and secure a better rate. This is called early renewal, or sometimes the blend-and-extend option. This is because your old interest rate is blended with the rate of your new term. Depending on your lender, you might avoid having to pay a prepayment penalty, but administrative fees might still apply.

    By law, your lender must be transparent on how it calculates your interest rate. By being proactive and factoring in all costs of breaking your mortgage, you can determine if your current lender still suits your needs. If not, it’s time to start shopping around for a new lender.

    Option 2: Changing lenders

    Sometimes when considering renegotiating, you’ll find a more favourable interest rate at a different institution. To sign with a different lender and secure a better rate, you’ll need to pay the prepayment penalty to your current lender and break your contract. This penalty can be pricey, so make sure to calculate how much you’ll save with the new rate, versus how much you’ll pay your current lender in fees.

    A lower interest rate doesn’t necessarily mean you’ll save money. Breaking your mortgage contract can mean lots of administrative fees and penalties, some of which might take you by surprise if you haven’t done your homework. By consulting a qualified mortgage broker, you can get an expert’s opinion on your current finances and the going rates, helping you write a roadmap for your financial future.

    If you have any questions about blended interest rates, prepayment penalties, or breaking your mortgage contract, don’t hesitate to contact Milka Lukacevic and the experts at The Mortgage Centre today.