What Can You Do to Get Out of Mortgage?

What Can You Do to Get Out of Mortgage?

Signing a mortgage contract means you agree to make payments for a certain “term” (which should not be confused by the amortization period). It is sometimes necessary to break a mortgage contract. Breaking a mortgage contract early means stopping making the agreed-upon payments before the term is up. Common reasons for breaking a mortgage in Ontario include:

• Switching lenders to capitalize on lower rates
• Early renewal option (blend-and-extend)
• The need to sell the house (such as to relocate)
• The need to upgrade your house with the home equity
• Inability to make monthly repayments (such as after getting fired)

Whatever the reasons for breaking your mortgage contract are, it is important to understand the implications. Below are important questions you should ask your approved mortgage broker before breaking the contract.

What penalties will I incur?

The greatest drawback of breaking your mortgage contract is that you will incur a penalty. Different lenders have different methods of calculating the penalty. The prepayment penalty will be the higher of the 2 penalty calculations. These are:

• IRD (interest rate differential): IRD compensates the lender for the interest they are losing out on because of the contract breakage. The calculation is done by finding the difference between the amounts of interest you would have paid on your current term for both rates. Since interest rates fluctuate, the interest rate you were charged and what you would be charged at the time of breaking the mortgage are usually different.
• 3 months interest: The prepayment penalty is based on the amount of interest you would pay in three months.

The penalty applicable for a variable rate mortgage is easier to calculate and significantly lower. Different lenders have different ways of calculating variable rate penalties, but this usually amounts to 3 months’ worth of interest.

Are mortgages portable?

There are portable mortgages that allow you to transfer your mortgages and interest rates to the next property if you want to change properties. You will not have to pay a mortgage penalty with a portable mortgage.

Are there clauses in mortgages that impact your options?

Some mortgages have clauses that could influence your options. An example of this is the Bona-fide Sales Clause which stipulates that you cannot pay off your mortgage during the term without selling the property first. Another example is the No Port Option which stipulates that you cannot port your mortgage to a different property if you sell during the current term.

Do I make or lose money with a new mortgage?

You could lose money if you cancel your mortgage, even if the new interest rate is lower. The savings could be offset by the prepayment penalties. A mortgage broker will help you calculate it.

What options are available to breaking a mortgage contract?

According to the Financial Consumer Agency of Canada which is an independent federal government agency tasked with enforcing the consumer protection legislation, regulations, and industry commitments, homeowners can consider mortgage payment deferral programs, early mortgage renewal, or use funds from government benefits, savings, or investments to contribute to mortgage payments. You could also go to a private mortgage lender for flexible payment options.