The Legal Penalties of Breaking a Mortgage Contract in Canada (PDF)

The Legal Penalties of Breaking a Mortgage Contract in Canada

When you sign a mortgage contract, you are agreeing to make payments for the term of the mortgage (usually 5 years). After the term, you have the option to renew your mortgage for another term or to pay off the balance. If you choose to break your mortgage contract before the end of your term, it is important to understand that there are penalties for doing so.

Breaking your mortgage contract

When it comes to breaking your mortgage contract, there are two main options:  

Early renewal (blend and extend) Break your contract to change lenders

Early renewal option

This option involves extending the term of your current mortgage with your current lender and blending your new interest rate with your current one. This can be a good option if you anticipate that interest rates will rise before the end of your current term. And since you are staying with the same lender, this option can help you avoid penalty fees for prepayment.

Switching lenders

The main reason why Canadian mortgage holders choose to switch lenders before the end of their mortgage term is because they can get a lower interest rate with the new lender. There will be a prepayment penalty with your current lender if you choose this option, but it may be worth it depending on how much you are able to save in interest. (Your mortgage broker can run this calculation for you to see if this option makes sense for you).

How much does it cost to break your mortgage?

When you break your mortgage contract, there are a number of fees that you will have to pay the lender including your prepayment penalty, and possibly an administration fee. The amount that you’ll have to pay for your prepayment penalty depends on a few different factors including how much time is left in your current term and whether you have a fixed or a variable rate mortgage.

Calculating the fee on a fixed rate mortgage is more difficult – and should be done with the help of a mortgage broker. The fee will be either the interest rate differential (which compensates the lender for the interest they are losing because you broke your contract early) or it is 3 months worth of interest – whichever is higher.

Calculating the penalty fee on a variable rate mortgage is significantly easier because it is always approximately 3 months worth of interest. (That being said though, there are a few unconventional lenders who may still charge IRD with a variable rate mortgage).

Is it ok to break my mortgage early?

While there will be financial penalties for breaking your mortgage early, there are some circumstances where it may make sense to do so including:     

If you are able to save more in interest than you will pay in your penalty by changing mortgages.

If you need to sell your home and cannot transfer your current mortgage to your new property.

If you are unhappy with your current lender.

If you have improved your credit and can switch from a bad credit mortgage to a traditional mortgage.

If your financial situation has changed.

Contact Sure Loan for You Today

Breaking your mortgage early comes with penalties but there are times when it makes sense. If you would like to explore your options, Contact Sure Loan For You for more details.