There are many reasons you may want to – or need to – cancel your mortgage. Maybe you’re paying too much interest. Maybe you need to relocate for work. Or maybe you haven’t even moved in yet, but your circumstances have changed.
Regardless of the reason, breaking a mortgage can be difficult and expensive. Here’s a brief overview of how to cancel your mortgage.
If you haven’t yet received the loan, but have signed the contract.
If you have already signed your mortgage documents but no longer need the loan, ask your lender if they have a cancellation policy. Be aware that every mortgage contract is different. You may need a lawyer’s or mortgage broker’s help to cancel your mortgage, and you may need to pay a cancellation fee.
If you have a closed mortgage and your term isn’t up.
In Canada, most homeowners opt for a closed mortgage with either a fixed or variable rate. The biggest benefit of closed mortgages is that interest rates are much lower than those for open mortgages. However, to offset the lower rates, lenders lock homeowners in a contract for a fixed length of time, which is called a term. Homeowners can break their mortgage before the term is up, but of course, there’s a fee for that.
What? It’s going to cost me how much to break my mortgage?
Cancelling a mortgage can be incredibly expensive. Don’t forget, a mortgage is a legal contract. When a client decides to break that legal contract, the lender will charge that client a significant penalty to do so.
So how is this penalty calculated? Well, it depends on the lender. It also depends on what your mortgage agreement says. Generally, lenders charge three months’ interest or the Interest Rate Differential (IRD), whichever is higher. The formula to calculate IRD changes from one lender to another. It’s essentially a calculation that allows for lenders to recoup a sizeable portion of the money they are losing due to the cancellation of the contract.
Breaking a mortgage can cost several thousands of dollars, which may come as a surprise to mortgage holders.
Are there other options I should be aware of?
If you’re selling your home because you’re buying another, ask your lender if they’ll allow you to port your mortgage. Porting a mortgage means transferring your mortgage from your current property to your new one. But beware – not all lenders allow it.
If you were hoping to break your mortgage to get a better interest rate but the penalty is too expensive, ask about a “blend and extend”. This trick allows you to get an interest rate somewhere between your current rate and the new, lower posted rate – essentially blending the two. Most lenders don’t charge a fee for a blend and extend. The catch? Your lender will likely force you to extend your term. So if your original contract was for a five year term, odds are your new blend and extend rate would reset your date, locking you in for five more years.
Do you have a question about cancelling your mortgage? Not sure what to do? Contact us today for a free consultation. We’ll let you know how we can help!
ronald June 24th, 2016