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:

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:

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.

Learn about tips to reduce or avoid prepayment penalties.

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:

Table 1: Calculate your new blended interest rate
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.

Table 2: Example of costs to change lenders
Costs Current lender
(using blend-and-extend option)
Lender X Lender Y
Interest rate 4.6% 3.75% 3.5%
Interest you’ll pay during a new 5-year term $36,701 $34,350 $32,005
Prepayment penalty $0 $6,000 $6,000
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.

Pros

Cons

For more information on breaking your mortgage contract, contact your lender.

Related links

Did you find what you were looking for?

What was wrong?

You will not receive a reply. Telephone numbers and email addresses will be removed.
Maximum 300 characters

Thank you for your feedback

Date modified: