How to Get Out of a Mortgage

It's not you, it's me — what if I want to break up with my current mortgage?

Sometimes, life happens a little differently than you planned. If your situation or needs have changed, and your mortgage terms no longer fit the bill, you may want to get out of your contract early, before your renewal comes up.

When you signed your mortgage, you agreed to a whole bunch of conditions (like a payment schedule) as well as penalties and fees for breaking them. So the type of mortgage you signed onto in the first place will dictate how messy — or easy — the contract break may be.

Are you allowed to break your mortgage?

Usually, yes. Of course, unless you're paying it out in full with an influx of funds, or are selling and not buying again — you still owe the loan amount and will need a new contract, even if it's with a different lender. The question, really, is how much it will cost you.

Why break your mortgage contract?

There are very good, everyday reasons for a mortgage-contract change. You may want or need to:

• Buy a new home, (sell your current home)
• Sell your home outright
• Get out of a joint mortgage, or change the name on the mortgage title
• Renegotiate to take advantage of a better rate or to pay off your mortgage faster
• Refinance to lower payments, consolidate debt, or add a Home Equity Line of Credit for renovations or investing purposes
• Switch to a different lender for better rates or terms
• Pay out your mortgage entirely

Regardless of the reason, the costs and paperwork involved will depend on the type of mortgage you have, and the terms:

• Open or closed mortgage
• Variable or fixed-rate mortgage
• Extra clauses that may restrict or prevent pre-payment options

Why does a closed mortgage have more penalties than an open open one?

An open mortgage allows the flexibility to increase your payments, pay out your mortgage, or convert to another term at any time — with no penalty (admin fees may apply). The trade off is higher mortgage rates.

A closed mortgage (the most common mortgage type in Canada) offers lower rates but comes with restrictions and penalties if you want to break your term early. Some lenders may offer wiggle room in certain cases, such as a 'blend and extend' of rates to lengthen your mortgage term. But for the most part, breaking a closed mortgage before end of term may cost thousands.

What costs are involved in breaking your mortgage?

To know exactly what your costs will be, contact your lender for their specific terms. Armed with this information, you'll be able to make further decisions.

Find out how much you'll pay for:

• A pre-payment penalty (different for variable versus fixed-rate mortgages)
• Administration fees
• Appraisal fees
• Reinvestment fees (if you pay out your mortgage in your first term)
• A mortgage discharge fee to remove the charge on your current mortgage and register a new one (collateral charge mortgage may incur more costs)

How is your mortgage penalty charged?

There can be three kinds of mortgage pre-payment penalties when breaking your mortgage:

• Early payoff penalty. Some lenders will charge an amount equal to a certain percentage of the overall unpaid principal balance at the time of payout.
• 3 months interest. Usually the charge for a variable-rate mortgage, which can be a lower penalty than a fixed-rate mortgage.
• IRD (Interest Rate Differential). If you have a fixed-rate mortgage, you'll pay the greater of 3 months interest or the IRD.

Lenders may differ on how they calculate the IRD for your mortgage, but here's a quick example: Your mortgage interest rate minus the current market rate, then multiplied by your mortgage balance, divided by 12, and multiplied again by 15.

Is your mortgage registered as collateral or traditional?

It's becoming a common practice for some lenders to register your mortgage as a collateral one, versus a traditional registration — for banks to allow credit lines to be attached to your mortgage amount. Collateral mortgages usually aren't transferrable, and require a fee to discharge. This type of mortgage also means you'll need to either pay off any credit line or loans borrowed against the home's equity, or include these loans as part of a mortgage transfer.

Do you have extra clauses in your current mortgage?

Depending on the lender, you may have signed onto extra clauses that could impact your options in breaking your mortgage early.

• Bona-fide sales clause means you can't pay off your mortgage during the term unless you sell your property. This very restrictive mortgage condition may be tacked on to 'ultra-low rate' mortgages offered on the Internet, so beware. If your mortgage contains this clause, your options may be limited.
• No port option means you can’t take the mortgage with you to a different property if you sell during your term.

Are there other ways to break my mortgage without penalties?

Some lenders may allow the following options, if they apply to your particular situation.

• Port your mortgage. This option would allow you to transfer your mortgage and rate to a new property, and avoid penalties.
• Assume your mortgage. If you sell your home, the buyers could potentially take over your mortgage and payments, which means you avoid 'technically' breaking the contract. Lenders may have hoops to jump through for this option, and the new buyers would need to qualify for your mortgage terms separately.

Do my total savings outweigh the cost of the mortgage penalty?

Sometimes a lower mortgage rate doesn’t automatically mean that you'll save money over your mortgage term.

If the mortgage that comes with those lower rates has too many restrictions, it may cost you more in the long run. But if rates are low enough, you just may end up saving more, over and above the costs involved in breaking your mortgage.

Talk to one of our highly-trained brokers today, for great advice on whether breaking your mortgage is the right decision to save cash — or for what you'll pay in penalties and fees if you absolutely need to make the break.

We guide you through the process quickly and seamlessly, and outline all options so that you can make an informed decision.

To break, or not to break? Our expert brokers have the answers, for less stress and clearer decisions. Anywhere you are in Canada, you'll get great advice and unbeatable service.