Penalty for Breaking a Mortgage in Canada | Guide

Breaking a mortgage can mean facing some significant mortgage penalties

Breaking a Mortgage

Breaking up may be hard to do, but breaking a mortgage early? That’s a bit like navigating a maze and a story unto itself. Let’s take a moment to review the penalty for breaking a mortgage, and if there is a fee when looking at lower refinance mortgage rates.

Why Break Your Mortgage Contract?

The mortgage contract you signed outlines the key terms of breaking a mortgage early. So, what exactly does “breaking a mortgage early” mean? It means moving away from your current contract to secure a different mortgage before the stated renewal date. Perhaps you want to move, or your dream home beckons from a different neighbourhood. Maybe mortgage rates are dropping, and you have a higher mortgage rate. It happens. But before you pull the trigger, you must understand what kind of penalty for breaking the mortgage you’re getting into and get a mortgage audit.

The Cost to Break Your Mortgage Contract

Here’s the kicker: breaking up with your mortgage lender to secure a lower home refinance rate likely comes with a price tag. Whether it’s a stated penalty for a closed mortgage or a sum of monthly interest for an open variable, here are things you need to review in your mortgage commitment document:

Prepayment Mortgage Penalty: Breaking a closed mortgage likely means a hefty prepayment penalty. Brace yourself; depending on when you break your agreement, this can cost thousands of dollars.

Additional Fees: Beyond the penalty, you may face administrative, appraisal, and reinvestment fees, plus a mortgage discharge fee.

Mortgage Penalty for Changing Lenders

Maybe another lender is tempting you with a better deal. But hold your horses; there’s good news about switching lenders: As of November 21, 2024, OSFI removed the mortgage stress test requirement for uninsured borrowers completing a straight switch to another federally regulated lender at renewal, provided the mortgage balance is not increased, and the remaining amortization is not extended.

If you increase the mortgage amount, consolidate debt, access equity or extend the amortization, the transaction becomes a refinance and standard qualification requirements continue to apply. For example, if you elect to change the amortization or consolidate debt, in that case, it is a refinance, and you must continue to prove you can carry your mortgage at a minimum rate of 5.25% or at your contract rate plus 2% – whichever is higher. (OSF Stress Test Guidelines)

Pros and Cons of Breaking a Mortgage Contract

Before you declare “it’s over” with your current mortgage lender, weigh the pros and cons. Lower interest rates and potentially faster mortgage payoff sound sweet, but the bitter aftertaste of penalty fees could quickly spoil the opportunity.

Pros:

• You can snag a lower interest rate.

• There’s potential to pay off your mortgage faster.

• You lock in that lower interest rate for the new term.

Cons:

• Brace yourself for penalty fees.

• Repayment of a percentage of any cashback received.

• You could end up paying more once you factor in the cost of breaking the mortgage.

Alternatives to Breaking a Mortgage

Breaking up isn’t your only option. Consider the blend-and-extend move or port your mortgage to a new property. It’s like exploring the open relationship of mortgage choices – keep your options open.

Sometimes, it’s not a total breakup but more of a “let’s agree to meet in the middle” situation. Some lenders will allow you to Blend and Extend your existing fixed-rate mortgage with current rates if you extend your term. Lenders may let you modify your mortgage without a harsh penalty. But, of course, you might still incur some administrative fees. Note: This isn’t an option if you have to sell or want to move to a new lender.

Port Your Mortgage: This is when you buy a new home, and your lender lets you apply your existing contract to the new property.

How Much Will It Cost to Break a Mortgage?

This is the million-dollar question – or perhaps, the penalty question. The bad news is you’ll likely be facing a penalty, but is it worth it? That depends on whether you have a fixed- or variable-rate mortgage.

Breaking a fixed-rate term usually means incurring a higher penalty because fixed rates have different management costs for lenders. A variable-rate mortgage is much simpler and generally incurs a lower 3-month interest penalty.

Is Breaking a Mortgage a Good Idea?

Timing is everything. If mortgage rates drop or your local real estate market catches fire, breaking your mortgage might seem like a brilliant idea. But remember, brilliance may come at a cost. It’s all about weighing the interest savings against the prepayment penalty.

You May Not Have a Choice to Break a Mortgage

Life happens, plans change, and sometimes, you must move or sell during your term. If that’s your situation, fear not; as your mortgage pro, I can guide you through the labyrinth of mortgage decisions.

Want to Pay Out Your Mortgage Entirely?

If you’re ready to say goodbye to your mortgage entirely, there’s likely a penalty for that, too. But fret not; I’ve got advice on that front as well.

Get the Right Advice (and Rate) to Save the Most

Get the right advice before you go mortgage-breaking or commit to another term. A better rate may be tempting, but does it make financial sense? Let me help you decide whether to break or choose a better option at renewal time.

Conclusion: Your Mortgage, Your Decision

Breaking a mortgage is like navigating uncharted waters. It’s complex, and the currents can be substantial. But with proper guidance, you can sail through smoothly. Your mortgage, your decision – and I’m here to help you navigate the maze.

Get the right advice (and rate) to save the most.

Even if you see a better rate (of course, I can get the best rate you qualify for), switching before your term ends may not always make financial sense.

Whether you want to break early or need a better option at renewal, I can help you make the right financial decision.

Book a 30-minute meeting, and review your mortgage statement to see what you can save!

A mortgage penalty rarely comes with a clear explanation from your lender. Colin has helped clients across Ontario understand exactly what they owe to exit their mortgage, whether that's an IRD calculation on a fixed-rate term or three months' interest on a variable, and whether the savings on the other side actually justify the cost. He brings a numbers-first approach to every breakage conversation, because the decision that looks obvious at first glance often isn't once the full picture is on the table.

Colin Ballantyne is a Mortgage Agent Level 2

Licenced with BRX Mortgage (FSRAO Licence 13463, Licence ID M22000539), serving clients across Oakville, Burlington, Milton, Mississauga, and Ontario-wide.