Breaking a mortgage contract in Canada is a significant decision that can have various financial implications. Whether you’re considering this step due to changing financial circumstances, a move, or a desire to take advantage of lower interest rates, it’s essential to understand the process, costs, and potential benefits. This blog post will provide a comprehensive overview of what it means to break your mortgage contract, the reasons you might consider it, and the factors you need to weigh before making a decision.

What Does It Mean to Break a Mortgage Contract?

When you sign a mortgage contract, you agree to specific terms and conditions, including the interest rate, payment schedule, and the length of the term. Breaking your mortgage contract means you want to end these terms before the agreed-upon end date. This could involve paying off the mortgage early, refinancing with a different lender, or renegotiating the terms with your current lender.

Reasons to Break Your Mortgage Contract

There are several reasons why you might consider breaking your mortgage contract:

1. Lower Interest Rates: If interest rates have dropped significantly since you signed your mortgage, you might want to break your contract to secure a lower rate. This can reduce your monthly payments and the total interest paid over the life of the mortgage.
2. Financial Changes: Changes in your financial situation, such as a significant increase or decrease in income, might prompt you to break your mortgage. For example, if you receive a substantial raise, you might want to increase your mortgage payments to pay off the loan faster.
3. Moving: If you need to move for work, family, or other reasons, you might need to sell your home and break your mortgage contract.
4. Refinancing: You might want to refinance your mortgage to access equity in your home, consolidate debt, or switch from a variable to a fixed rate (or vice versa).

Costs of Breaking a Mortgage Contract

Breaking a mortgage contract can be costly, and it’s crucial to understand the potential fees involved:

1. Prepayment Penalty: Most closed mortgages come with a prepayment penalty if you pay off the loan before the end of the term. This penalty can be calculated in different ways, but it often involves either three months’ interest or the interest rate differential (IRD), whichever is higher.
2. Administration Fees: Lenders may charge administrative fees for processing the early termination of your mortgage.
3. Appraisal Fees: If you’re refinancing, you might need to pay for an appraisal to determine the current value of your home.
4. Reinvestment Fees: Some lenders charge a fee to cover the cost of reinvesting the funds from your mortgage.
5. Mortgage Discharge Fee: This fee covers the cost of removing the lender’s claim on your property title.
6. Cash Back Repayment: If you received any cash back when you signed your mortgage, you might need to repay a portion of it when breaking the contract.

Alternatives to Breaking Your Mortgage Contract

Before deciding to break your mortgage contract, consider these alternatives:

1. Blend-and-Extend: Some lenders offer a blend-and-extend option, which allows you to blend your current mortgage rate with a new rate and extend the term. This can help you take advantage of lower rates without incurring a prepayment penalty.
2. Porting Your Mortgage: If you’re moving, you might be able to port your mortgage to your new home. This means transferring your existing mortgage terms to the new property, avoiding penalties.
3. Making Prepayments: If your goal is to pay off your mortgage faster, check if your mortgage allows for prepayments. Many lenders let you make lump-sum payments or increase your regular payments without penalty.

Pros and Cons of Breaking Your Mortgage Contract

Pros:

• Lower Interest Rates: Securing a lower interest rate can save you money over the life of the mortgage.
• Access to Equity: Refinancing can provide access to home equity for renovations, investments, or debt consolidation.
• Improved Financial Flexibility: Adjusting your mortgage terms can better align with your current financial situation.

Cons:

• High Costs: Prepayment penalties and other fees can be substantial.
• Complex Process: Breaking a mortgage contract involves paperwork and negotiations with your lender.
• Potential for Higher Rates: If interest rates rise after you break your mortgage, you might end up with a higher rate than expected.

Steps to Break Your Mortgage Contract

If you’ve decided that breaking your mortgage contract is the right move, follow these steps:

1. Review Your Mortgage Terms: Understand the specific terms and conditions of your mortgage, including any penalties and fees.
2. Calculate the Costs: Determine the total cost of breaking your mortgage, including prepayment penalties, administrative fees, and other charges.
3. Shop Around: Compare offers from different lenders to ensure you’re getting the best deal. Consider both the interest rate and the terms of the new mortgage.
4. Consult a Professional: Speak with a mortgage broker or financial advisor to understand your options and the potential impact on your finances.
5. Negotiate with Your Lender: Contact your current lender to discuss your options. They might offer alternatives, such as a blend-and-extend, that could save you money.
6. Complete the Paperwork: If you decide to proceed, complete the necessary paperwork to break your mortgage and secure a new one.

Conclusion

Breaking your mortgage contract in Canada is a significant decision that requires careful consideration of the costs, benefits, and alternatives. By understanding the process and weighing your options, you can make an informed choice that aligns with your financial goals. Remember, the information provided in this post is for **educational purposes only** and should not be considered legal advice. For specific legal concerns or questions related to your mortgage, it is always best to consult with a qualified legal professional.

If you have any questions or need further clarification on any of the topics covered, please do not hesitate to contact me I’m here to assist you and provide the support you need as you navigate your mortgage journey.