Understand the penalties of breaking your mortgage before the term matures

August 25, 2022 By: MortgageExecutives

Fixed-rate mortgages are in high demand at this time and are gaining in popularity, while variable-rate mortgages are looking too unpredictable. If the market is telling us that fixed-rate mortgages have an advantage, then be sure to read  and fully understand the fine print because the devil is in the details and early payout penalties are rarely discussed.

Why? Sometimes you just can’t predict what’s going to happen, you may need to consolidate your debts, credit card rates are too high, refinance might be your best option.  It’s impossible to plan for future let alone the things that will happen in our lives, like losing a job, parent’s illness, our own unexpected illnesses, separation or divorce, adult kids moving back in, relocation, unexpected major repairs on the house or another personal matter.  Imagine when mortgage rates become lower in the near future. Your financial needs and the markets can shift easily during a 5 year term of your mortgage and the last thing you want is a painful penalty to get out of your mortgage early. That’s why it’s important to consider what your early payout penalty may be before you renewing your mortgage. We all want to believe that none of these scenarios will happen to us, but when they do, it’s best to already know your options to getting out of your current mortgage.

Generally speaking to break your mortgage, you can expect to pay the greater of either

1. a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.  Not all lenders calculate IRD the same way, and the differences can amount to thousands or even tens of thousands of dollars.

Early payout penalties are very important to consider if you are looking at a 5-year mortgage. If you break a 5-year mortgage before the term matures, the penalty with most lenders can be substantial. If there is a chance you could end up breaking the mortgage in the first 3 years, you may not want to consider a 5-year term.

When choosing between mortgages, be sure to compare how the early payout penalty will be calculated. If you ever need to get out of your mortgage early, having the right mortgage/lender could save you a lot of stress and big money. Advice on how to avoid painful penalties is part of the knowing your clients and their future plans, I do this for all my clients!

If you have any questions about breaking a mortgage don’t hesitate to reach out,

I hope this message helps you.