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 your mortgage is open or closed. An open mortgage allows you to break the contract without paying a prepayment penalty.
If you break your closed mortgage contract, you normally have to pay a prepayment penalty. This can cost thousands of dollars.
Before breaking your mortgage contract, find out if you must 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.
Early renewal option: Blend-and-extend
Some mortgage 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. Lenders call this option the blend-and-extend, because your old interest rate and the new term’s interest rate are blended. You may need to pay administrative fees.
Your lender must tell you how it calculates your interest rate. To find the renewal option that best suits your needs, consider all the costs involved. This includes any prepayment penalty and other fees that may apply.
How to calculate the blended interest rate
This method of calculating a blended interest rate is simplified for illustration purposes. It does not include prepayment penalties. Your lender can combine the prepayment penalty with the new interest rate or ask you to pay it when you renegotiate your mortgage.
Example : Calculate the blended interest rate
Suppose interest rates have gone down since you signed your mortgage contract. To take advantage of these lower rates, you're considering terminating your mortgage and renegotiating a new mortgage with your current lender.
Suppose you have:
- mortgage balance: $ 200,000
- remaining amortization: 22 years
- current interest rate: 5.5%
- months until end of the term: 24
- current interest rate for a 5-year term offered by the current lender: 4.0%
- current term: 5 years or 60 months
- 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 of 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 of 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 in 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 renegotiate your mortgage contract and change lenders because another lender offers you a lower interest rate. In this case, you may need to pay a prepayment penalty to break your mortgage contract. Make sure the benefits of breaking your mortgage contract will save you money once you include all the fees.
Example: Costs when you break your mortgage contract to change lenders
Suppose a different lender is offering you 3.75% interest. To break your mortgage contract with your current lender you’ll need to pay a prepayment penalty of $6,000.
You may also choose a blend-and-extend option with your current lender. This would give you a 4.6% interest rate.
(using blend-and-extend option)
|Lender X||Lender Y|
|Interest you’ll pay during a new 5-year term||$36,701||$34,350||$32,005|
|Total cost to renegotiate your mortgage||$36,701||$40,350||$38,005|
In this example, you pay less when you choose a blend-and-extend option with your current lender.
Note that you’ll usually need to pay fees when you set up a new mortgage, including when you choose a blend-and-extend option. This example doesn’t take into account any fees. Lenders may be willing to pay some or all of the fees. If this is the case, your costs to renegotiate your mortgage will be less.
Pros and cons of breaking your mortgage contract
When interest rates fall, it may be tempting to break your existing mortgage and renegotiate a new one at a lower interest rate, or to blend-and-extend. Before you do, consider the pros and cons.
- you get a lower interest rate
- you may be able to pay off your mortgage faster if you keep your payments the same
- you can lock in the lower interest rate for the new term of the mortgage
- you could end up paying more in the long run because of fees and a prepayment penalty
- you may no longer qualify for a mortgage under the current economic conditions
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