How Breaking Your Mortgage Contract Works

Fivewalls: Breaking Your Mortgage Contract

Sellers, Buyers, Tips & Advice
Last Updated: Apr 01, 2020

There are many different mortgages to choose from to suit your lifestyle and needs, and with those mortgages come a lot of rules, especially regarding breaking your contract. Here, we explore when you should consider breaking your mortgage contract.
 

Why You May Have To Break Your Mortgage Contract

When you sign a mortgage contract, you are agreeing to stay under that contract until the decided end date. You decide on the term (the most popular term in Canada is five years), but if you plan on moving, or interest rates have gone down, you may want to exit that contract early. This results in prepayment penalties, which could be quite significant. Before breaking it, ask your lender about how much you would have to pay, as well as a reinvestment fee. A better interest rate may have popped up to switch too, but is it worth it?
 

If You Want To Switch Lenders

Even if you have already undergone the stress test, you will have to pass it again with your new lender. Even if you stay with the same lender and enter a different mortgage contract, you will be subject to the test.

If you are staying with the same lender but wanting to change your mortgage contract, they may be more lenient about your prepayment penalties, depending on how much time is left on your contract.
 

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If you want to put more payments down on your mortgage throughout the year, an open mortgage may be for you. Interest rates for open mortgages are typically higher, but you can make extra payments without having to pay prepayment penalties. Your contract will state how much extra you can pay. If you go over, you may be subject to prepayment fees.
 

What Is A Fixed Rate Mortgage?

A fixed rate mortgage is similar to an open mortgage because you can make extra payments without paying a prepayment penalty. The “fixed rate” means that interest rate is also locked in for the amount of time you are under the contract, so it is more secure. A specific amount will be set of extra payments you can make.
 

Accelerated Payments

If you want to pay your mortgage off faster without breaking the contract, you can choose which payment frequency will work best for you – weekly, monthly, bi-weekly, etc.

When you choose to have accelerated payments, your interest rates will be lower.
 

Calculate Your Prepayment Penalty

Although it is most accurate if you ask your lender to calculate what you would owe, you can figure it out yourself by using a mortgage penalty calculator. It should give you a rough idea of the prepayment penalty you will have to pay in order to exit your contract.

 

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