You may want to break your mortgage early for several reasons; interest rates have gone down, your financial situation has changed, you want to buy a new home and are planning on moving or you may find that your current mortgage terms and conditions no longer meet your needs.
If you want to change the terms and conditions of your mortgage contract before the end of your term, you’ll need to renegotiate your mortgage contract. When you renegotiate your mortgage contract, you break your old mortgage contract and replace it with a new one. By doing so, you may incur a prepayment penalty for breaking your mortgage. Other fees may also apply such as administration fees, appraisal fees (if required), title insurance, legal fees, and a fee to remove a charge on your current mortgage and register a new one.
More often than not, breaking your mortgage to switch to the new one could save you thousands in interest payments over the life of the mortgage.
So, when will you most likely save money? There are three basic scenarios that generally work in your favour:
- Interest rates are dropping, and you are locked in at a rate much higher than the current market rates.
- You can reduce your overall monthly payments enough to offset any costs of refinancing penalties.
- You have credit card debt that is not getting paid off, your payments are too high, and you are finding yourself in financial difficulty.
It’s important to note, however, to qualify for a new mortgage at a bank, you will still need to pass the OFSI mortgage stress test. You will need to prove you can make payments at a qualifying Bank of Canada’s five-year benchmark rate (now 5.34%) or the customer’s mortgage interest rate plus 2%, whichever is greater.
This is when a Mortgage Broker comes in handy. If you’re at all unsure of whether you’ll stay in your home over the length of the term, we can help you determine how the penalties and fees will be calculated, how much you could save long-term by breaking your mortgage or if you will qualify for your new mortgage before breaking your existing one.
Give us a call if you have any questions.
