Breaking your mortgage contract
Why break your mortgage contract
The current conditions of your mortgage contract may no longer meet your needs. If you want to make changes before the end of your term, you can renegotiate your mortgage contract. This is also known as breaking your mortgage contract.
You may want to break your mortgage contract if:
- interest rates have gone down
- your financial situation has changed
- you want to buy a new home and are planning on moving
- your family situation has changed
- your home no longer meets your needs
Read your mortgage contract or ask your lender if you can break your mortgage contract.
Cost to break your mortgage contract
The cost to break your mortgage contract depends on whether you have an open or closed mortgage. An open mortgage allows you to break the contract without paying a prepayment penalty.
If you break your closed mortgage contract, you normally pay a prepayment penalty. This fee can cost thousands of dollars.
Before breaking your mortgage contract, find out if you’ll have to pay:
- a prepayment penalty and, if so, how much it will cost
- administration fees
- appraisal fees
- reinvestment fees
- a mortgage discharge fee to remove a charge on your current mortgage and register a new one
You may also have to repay any cash back you received when you got your mortgage. Cash back is an optional feature where your lender gives you a percentage of your mortgage amount in cash.
Contact your financial institutions to calculate the cost of breaking your mortgage contract.
Learn about tips to reduce or avoid prepayment penalties.
Early renewal option: Blend-and-extend
Lenders may allow you to extend the length of your mortgage before the end of your term. If you choose this option, you don’t have to pay a prepayment penalty. You may have to pay administrative fees.
With this option, lenders blend your old interest rate and the new term’s interest rate. Lenders call this option the blend-and-extend, or blended mortgage.
Your lender must tell you how it calculates your new interest rate. To find the renewal option that best suits your needs, consider all the costs involved.
How to calculate the blended interest rate
This is a simplified method of calculating a blended interest rate for illustration purposes.
Example : Calculate the blended interest rate
Suppose interest rates have gone down since you signed your mortgage contract. You’re considering breaking your mortgage and renegotiating a new mortgage with your current lender at a lower rate.
Suppose you have a mortgage with the following conditions:
- mortgage balance: $200,000
- remaining amortization: 22 years
- current interest rate: 5.5%
- months until the end of the term: 24
- current fixed interest rate for a 5-year term offered by the current lender: 4%
- payment frequency: monthly
| Steps to calculate a blended interest rate | Example | Enter your information |
|---|---|---|
| Step 1: multiply your current interest rate by the number of months remaining on your current term | 5.5% x 24 months = 132 | |
| Step 2: subtract the number of months for the new term from the number of months remaining on your current term | 60 months – 24 months = 36 months | |
| Step 3: multiply today’s interest rate by the difference between the number of months for the new term and the number of months remaining on your current term | 4% x 36 months = 144 | |
| Step 4: add the results of Step 1 and Step 3 | 132 + 144 = 276 | |
| Step 5: divide the results of Step 4 by the number of months for the new term | 276 / 60 = 4.6 |
If you choose the blend-and-extend option, your mortgage rate will be 4.6% for the next 60 months.
Break your mortgage contract to change lenders
You may decide to change lenders because another lender offers you a lower interest rate.
Make sure the benefits of breaking your mortgage contract will save you money once you include all the fees. Compare the costs and benefits of breaking your mortgage contract with your other options.
These include:
- using your current lenders’ blend-and-extend option
- keeping your current mortgage contract and negotiate a lower interest rate when you renew your mortgage
Note that you’ll usually have to pay fees when you set up a new mortgage. This includes when you choose a blend-and-extend option. Lenders may be willing to pay some of all the fees. If this is the case, your costs to renegotiate your mortgage with a new lender will be less.
Contact your financial institutions to calculate the costs of your available options.
Use the Mortgage Calculator to calculate your interest costs.
Pros and cons of breaking your mortgage contract
When interest rates fall, it may be tempting to break your mortgage contract. You may want to renegotiate a new one at a lower interest rate, or to blend-and-extend. Before you do, consider the pros and cons.
Pros
- you get a lower interest rate
- you may be able to pay off your mortgage faster if you keep your payments the same
- you may lock in the lower interest rate for the new term of the mortgage
Cons
- you may end up paying more eventually because of fees and a prepayment penalty
- you may no longer qualify for a mortgage under the current economic conditions
For more information on breaking your mortgage contract, contact your lender.
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