Smarter Loans Inc. is not a lender. Smarter.loans is an independent comparison website that provides information on lending and financial companies in Canada. We work hard to give you the information you need to make smarter decisions about a financial company or product that you might be considering. We may receive compensation from companies that we work with for placement of their products or services on our site. While compensation arrangements may affect the order, position or placement of products & companies listed on our website, it does not influence our evaluation of those products. Please do not interpret the order in which products appear on Smarter Loans as an endorsement or recommendation from us. Our website does not feature every loan provider or financial product available in Canada. We try our best to bring you up-to-date, educational information to help you decide the best solution for your individual situation. The information and tools that we provide are free to you and should merely be used as guidance. You should always review the terms, fees, and conditions for any loan or financial product that you are considering.
When you sign a mortgage with a lender, you agree to specific conditions, such as the interest rate, the term, the amortization period, and whether the loan is fixed or variable. “Breaking your mortgage” simply means that you are changing the conditions of the contract or electing not to fulfill the entire term.
Life happens. When you signed on the dotted line for your mortgage, chances are it fit your needs at the time. But as time went on, your circumstances (or external factors) may have changed. And as circumstances evolved, the mortgage you have may not be a great fit after all.
Here are some of the most common reasons Canadians think about breaking their mortgage:
You either have an open or closed mortgage. In the case of an open mortgage, the good news is that you can break the contract without incurring a penalty (although you’ve paid for this privilege in the form of a higher mortgage rate). If you have a closed mortgage, though, you’ll have to pay fees to your lender. As the Financial Consumer Agency of Canada notes, these can include prepayment fees, administrative fees, a mortgage discharge fee, appraisal fees, and reinvestment fees. Plus, if you received any cash back when you got your mortgage, you may be on the hook for that, too.
There are pros and cons to breaking a mortgage. Typically, the biggest advantage to doing so is the ability to get a new mortgage at a lower interest rate. These savings can be considerable, especially if mortgage rates have plummeted. What’s important, however, is to check and see if the savings will outweigh the costs. In this regard, breaking a closed mortgage and getting a loan from a new lender is costlier than breaking a mortgage but sticking with your existing lender. In the latter case, if you “blend and extend” your mortgage (i.e. increase the term), you usually don’t have to pay a prepayment penalty.
Leaving your existing lender will result in a prepayment penalty, on the other hand. Your mortgage contract sets out how this fee is calculated. For example, if you have a variable-rate mortgage, the prepayment penalty is typically three months worth of interest on your current mortgage balance. Most lenders have handy mortgage penalty calculators that show you how much you’ll have to pay to break your contract.
