Why break your mortgage contract
The current conditions of your mortgage contract may no longer meet your needs. If you want to make changes before the end of your term, you can renegotiate your mortgage contract. This is also known as breaking your mortgage contract.
You may want to break your mortgage contract if:
- interest rates have gone down
- your financial situation has changed
- you want to buy a new home and are planning on moving
- your family situation has changed
- your home no longer meets your needs
Read your mortgage contract or ask your lender if you can break your mortgage contract.
Cost to break your mortgage contract
The cost to break your mortgage contract depends on whether you have an open or closed mortgage. An open mortgage allows you to break the contract without paying a prepayment penalty.
If you break your closed mortgage contract, you normally pay a prepayment penalty. This fee can cost thousands of dollars.
Before breaking your mortgage contract, find out if you’ll have to pay:
- a prepayment penalty and, if so, how much it will cost
- administration fees
- appraisal fees
- reinvestment fees
- a mortgage discharge fee to remove a charge on your current mortgage and register a new one
You may also have to repay any cash back you received when you got your mortgage. Cash back is an optional feature where your lender gives you a percentage of your mortgage amount in cash.
Contact your financial institutions to calculate the cost of breaking your mortgage contract.
Learn about tips to reduce or avoid prepayment penalties.
Early renewal option: Blend-and-extend
Lenders may allow you to extend the length of your mortgage before the end of your term. If you choose this option, you don’t have to pay a prepayment penalty. You may have to pay administrative fees.
With this option, lenders blend your old interest rate and the new term’s interest rate. Lenders call this option the blend-and-extend, or blended mortgage.
Your lender must tell you how it calculates your new interest rate. To find the renewal option that best suits your needs, consider all the costs involved.
How to calculate the blended interest rate
This is a simplified method of calculating a blended interest rate for illustration purposes.
Example : Calculate the blended interest rate
Suppose interest rates have gone down since you signed your mortgage contract. You’re considering breaking your mortgage and renegotiating a new mortgage with your current lender at a lower rate.
Suppose you have a mortgage with the following conditions:
- mortgage balance: $200,000
- remaining amortization: 22 years
- current interest rate: 5.5%
- months until the end of the term: 24
- current fixed interest rate for a 5-year term offered by the current lender: 4%
- payment frequency: monthly
If you choose the blend-and-extend option, your mortgage rate will be 4.6% for the next 60 months.
Break your mortgage contract to change lenders
You may decide to change lenders because another lender offers you a lower interest rate.
Make sure the benefits of breaking your mortgage contract will save you money once you include all the fees. Compare the costs and benefits of breaking your mortgage contract with your other options.
These include:
- using your current lenders’ blend-and-extend option
- keeping your current mortgage contract and negotiate a lower interest rate when you renew your mortgage
Note that you’ll usually have to pay fees when you set up a new mortgage. This includes when you choose a blend-and-extend option. Lenders may be willing to pay some of all the fees. If this is the case, your costs to renegotiate your mortgage with a new lender will be less.
Contact your financial institutions to calculate the costs of your available options.
Use the Mortgage Calculator to calculate your interest costs.
Pros and cons of breaking your mortgage contract
When interest rates fall, it may be tempting to break your mortgage contract. You may want to renegotiate a new one at a lower interest rate, or to blend-and-extend. Before you do, consider the pros and cons.
Pros
- you get a lower interest rate
- you may be able to pay off your mortgage faster if you keep your payments the same
- you may lock in the lower interest rate for the new term of the mortgage
Cons
- you may end up paying more eventually because of fees and a prepayment penalty
- you may no longer qualify for a mortgage under the current economic conditions
For more information on breaking your mortgage contract, contact your lender.
Related links
- Renewing your mortgage
- Paying off your mortgage faster
- Selling a home
- Discharging a mortgage
FAQs
What are the penalties for breaking a mortgage? If you break a variable-rate mortgage, you'll typically pay a penalty equal to three months' interest. If you break a fixed-rate mortgage, your lender will likely determine how much you owe based on their interest rate differential (IRD) calculation.
Can I walk away from my mortgage in Canada? ›
Can I walk away from my mortgage in Canada? Lenders in Canada must allow homeowners some time to try and tackle any mortgage payments they are struggling to make, instead of simply allowing them to walk away from their mortgage.
Can I leave a 5 year fixed mortgage early? ›
You can usually leave a fixed rate mortgage early – however, lenders usually require an early repayment charge and an exit fee.
Can you break a 5 year fixed mortgage? ›
To break a fixed-rate term, you'll pay an Interest Rate Differential (IRD) penalty or a 3-month interest charge, whichever is higher. Unless you have little time left in your term, you'll likely pay the higher IRD penalty. A variable-rate mortgage is cheaper to break— you'll only pay a 3-month interest penalty.
What are the new rules for mortgages in Canada? ›
What do the New Mortgage Rules Mean—in plain English? You can still buy a home with only a 5% down payment. However, you can no longer choose to pay off your mortgage over 35 years. You will now have to pay it off in 30 years or less (25 years is normal).
How much does it cost to exit mortgage early? ›
How much is an early repayment charge? An early repayment charge is usually between 1% and 5% of what you still owe on your mortgage agreement. You might be able to pay less if you have been with your lender a long time, but this is up to the lender. You can choose to pay your early repayment charge in one lump sum.
Can I get a mortgage in Canada if I live abroad? ›
Yes, Canadian banks and lenders generally require non-residents to provide a minimum 35% down payment. This means you must pay 35% of the property's cost in cash, with the remaining 65% potentially covered by a mortgage. Requirements may vary among banks, with some being more stringent than others.
Can I back out of a house offer Canada? ›
Yes, but there are legal implications when backing out of an accepted offer or real estate deal. Not only do these legal implications affect the buyer but these will also give the seller legal options that they can use against the buyer.
What happens if I stop paying my mortgage in Canada? ›
Mortgage default happens when you don't follow the terms of your mortgage agreement, like missing a regular payment. When this happens, your bank has the legal right to recover the amount you owe them. This may eventually lead to the forced sale of your home.
What is the 5 year rule for mortgages? ›
The 5 year rule for home ownership refers to the requirement that individuals must have owned and used their home as their primary residence for at least 5 consecutive years out of the last 8 years in order to qualify for certain tax benefits, such as the capital gains exclusion.
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
How much does it cost to get out of a 5 year fixed mortgage? ›
How much does an early repayment charge cost? The cost of an ERC is based on the outstanding mortgage amount and the point at which you are in your deal. Typically, ERCs range from 1% to 5% of the remaining loan, and this percentage tends to decrease each year you're into the deal.
What is the penalty for ending a mortgage early? ›
With closed, variable-rate mortgages, the prepayment penalty is typically three months' interest on the amount prepaid. Some lenders will base the penalty on your mortgage rate, others might use their prime rate. The more you exceed your prepayment limit, the higher your penalty will be.
What happens when you sell a house with a mortgage in Canada? ›
You'll either have to transfer or break your mortgage if you sell your property before your mortgage is paid. You may have to pay a penalty for early payment. Know that we can accommodate you. For more information, talk to your mortgage advisor.
What happens if I don't renew my mortgage in Canada? ›
Answer: If your mortgage is not renewed, you may have to pay the balance in full, face different terms, or risk foreclosure. Discuss options with your lender.
How can I get out of my mortgage without penalty? ›
There are several ways you can go about facilitating this. Refinance the loan – Mortgage refinancing refers to the process of obtaining a new home loan. At the time you refinance, your new mortgage loan will repay your old mortgage loan in its entirety, leaving you with a single loan and monthly payment.
How much is the penalty for paying off a mortgage early? ›
With closed, variable-rate mortgages, the prepayment penalty is typically three months' interest on the amount prepaid. Some lenders will base the penalty on your mortgage rate, others might use their prime rate. The more you exceed your prepayment limit, the higher your penalty will be.
What happens if I stop paying my mortgage Canada? ›
Mortgage default happens when you don't follow the terms of your mortgage agreement, like missing a regular payment. When this happens, your bank has the legal right to recover the amount you owe them. This may eventually lead to the forced sale of your home.
