Did you know that 6 out of 10 consumers break their mortgage within 3 years into a 5-year term? That means that 6/10 of borrowers will break a 5-year term mortgage well before it’s due…but do you also know what the implications are of this? With the increase of individuals breaking their mortgage due to the low interest rates, we thought it would benefit you to understand the full extent of implications that may happen if you choose to do so.
First things first, outside of the pandemic, people need to break a mortgage for a variety of reasons. Some of the most common include:
- Sale and purchase of a new home *without a portable mortgage
- To take equity out/refinance
- Relationship changes (ex. Divorce)
- Health Challenges or life circumstances are altered
And a whole other variety of reasons. What we are seeing now, is that due to the record setting low interest rates, many individuals are reaching out to their brokers to find out if breaking their mortgage in favour of a lower rate makes sense. In some cases, it most certainly does, and it ends up saving individuals a sum of money over the life of their mortgage that makes the penalty of breaking it worth it. However, we would like to point out and caution individuals.
With the instability of the rates and the constant rise and fall, the rate you are quoted on one day may not be the same as the next. This means that your penalty may start out quite small it could easily increase. To fully understand, here is a case study that demonstrates how the interest rate differential is calculated and how the penalty can shift within just a few weeks (note: To find out how the calculations are performed, read our previous blog HERE)
In March we had a client come to us who had a mortgage of approximately $355,000 signed at 3.49% fixed and was quoted a $3,000 penalty from the lender. They were on a 5-year fixed term and the penalty was well within reason for the client. However, they were not able to sell their place until August. Under normal circumstances, the penalty would have remained close to or at the same $3,000 they were initially quoted. By August, their mortgage amount owing was $350,000, but due to the ups and downs of the interest rates, the lender’s penalty calculation was affected. Their new total penalty in August came out to $13,000 at the time of sale!
All Mortgages are not created equally, each mortgage file needs to be looked at on a case by case basis before you decide to break your mortgage. It’s important to discuss, in-depth, with your broker and find out what the exact penalty amount will be and if it aligns with an amount you are comfortable paying.
If you have questions, we would be happy to review your file and run the numbers for you! Please reach out to us at email@example.com to find out more or give us a call (we return all our calls within 90 minutes or less!)