A mortgage is a contract that you can expect to live with for 15, 20, 25 years or longer. But what if during that time, you decide that you want a new mortgage completely, either because you want to switch to a different lender, or you sell your home? In Canada you’ll need to break it, whether it’s an Ottawa mortgage, Calgary mortgage, or Nova Scotia mortgage that you’re holding. There are actually many scenarios in which you might want to break your mortgage, but the hefty fees you’ll have to pay may not make it entirely worthwhile. Here’s one way to avoid those hefty break fees, and things to watch out for when it’s time to get an entirely new contract.
The first thing you have to do is prepay as much as you can up to the allowable limit. This sometimes require a little care on your part when you’re applying for the original mortgage. Make sure that your lender includes some flexibility within the contract that allows you to make lump sum payments when you have some extra cash flow, or that allow you to double up on some monthly payments. The amount that you can prepay is usually about ten to twenty per cent of the original amount on the mortgage. This can either be done the same way you pay your regular mortgage payment, or you can ask your lawyer to apply the lump sum to the total amount as you’re exiting the old contract.
While this most likely won’t help you avoid the break fees altogether, they will reduce the amount still remaining on the principal. It’s this principal amount that the break fees are going to be applied to. Reducing the principal amount means that there’s less money to apply all that interest towards (which is usually a percentage of the total interest the lender would receive if you hadn’t broken the mortgage.) And this could mean thousands of dollars in savings.
If you want to break your mortgage and won’t have the money for the break fees, even after making a lump sum prepayment, try to negotiate with the lender. Sometimes, if you are going to break your mortgage but want a new mortgage in its place, they’ll be willing to waive the break fees in exchange for keeping your business.
If neither of these options work for you, it might be time to take a long hard look at your situation and compare the drawbacks of breaking the mortgage to the benefits of keeping it. In the long run, it might be worthwhile to just keep your existing mortgage.