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Mortgage Penalties & Breaking Your Mortgage
A mortgage term may last several years.
Life does not always cooperate with that schedule.
You may decide to move, refinance, consolidate debt or switch lenders before your mortgage reaches maturity.
If you have a closed mortgage, changing the mortgage before the end of the term can result in a prepayment penalty.
And sometimes that penalty can be substantial.
That's why the cost of leaving a mortgage can be just as important as the interest rate you receive when you enter it.
What Is a Mortgage Prepayment Penalty?
A mortgage prepayment penalty is a fee a lender may charge when you repay more of the mortgage than your agreement permits.
That can happen if you:
- break the mortgage before maturity
- transfer the mortgage to another lender
- pay the entire mortgage off early
- sell the home and discharge the mortgage
- make prepayments exceeding your permitted privilege
Open mortgages generally allow repayment without the same type of prepayment penalty, while closed mortgages normally place limits on additional payments.
How Are Mortgage Penalties Calculated?
The calculation depends on your mortgage and lender.
Variable-rate and fixed-rate mortgages can have different penalty provisions.
Some fixed mortgages may involve calculations based on an interest-rate differential, while other situations can involve a specified number of months' interest.
The exact calculation is contained in your mortgage contract.
Federally regulated lenders must provide information explaining applicable prepayment privileges and how prepayment charges are calculated.
Why Can Two Mortgage Penalties Be So Different?
Two borrowers with similar mortgage balances can face very different penalties.
Variables can include:
- mortgage type
- contract rate
- current lender rates
- remaining mortgage term
- amount being repaid
- lender calculation methodology
- available prepayment privileges
This is why comparing mortgage rates without comparing mortgage terms can be misleading.
When Might You Break a Mortgage?
Homeowners may consider breaking a mortgage when:
Selling a home
The property is being sold before the mortgage term expires.
Buying another home
A homeowner is moving and the existing mortgage does not fit the new financing.
Refinancing
Additional equity is required for renovations, debt restructuring or another purpose.
Switching lenders
Another mortgage arrangement may provide better overall value.
Life changes
Divorce, job relocation, family changes or other circumstances can affect housing needs.
Can You Reduce a Mortgage Penalty?
Sometimes.
Depending on the mortgage, possible strategies may include:
- using available prepayment privileges before payout
- porting the mortgage
- waiting until maturity
- exploring a blend-and-extend option
- comparing the penalty against potential savings from changing mortgages
These strategies depend entirely on the mortgage contract and circumstances.
Don't Compare Rates Without Comparing Exit Costs
Suppose Mortgage A is slightly cheaper than Mortgage B.
If Mortgage A carries a significantly larger penalty when you need to sell two years later, the mortgage that initially looked cheaper could ultimately cost more. That's why mortgage features matter.
A good mortgage strategy considers both:
the cost of entering the mortgage
and
the potential cost of leaving it.
Before breaking an existing mortgage, determine the actual penalty and compare it with the financial benefit of making the change.
Talk with Haystax Mortgage before changing your mortgage so you can understand the complete cost, not simply the new interest rate. Find a Haystax Mortgage location here.
We work for you, not the banks, providing access to a wider range of mortgage options.
Banks offer only their mortgage products and rates. Unlike them, Mortgage Brokers have access to a variety of lenders, including banks, credit unions, monoline lenders, private financing, and more.
You're at HOME with Haystax!
Frequently Asked Questions
What is a mortgage prepayment penalty?
It is a fee a lender may charge if you repay more of your mortgage than your agreement permits, including breaking a closed mortgage before maturity, switching lenders early or paying off the mortgage when selling.
How much does it cost to break a mortgage?
The amount depends on the mortgage contract, lender, remaining balance, remaining term and applicable calculation. Penalties can sometimes amount to thousands of dollars, so request an actual payout figure from your lender before making a decision.
Can I break my mortgage without a penalty?
Open mortgages generally allow repayment without a prepayment penalty. Closed mortgages typically restrict how much can be prepaid without charge. Your contract determines the exact rules.
What is a mortgage prepayment privilege?
A prepayment privilege allows you to make additional payments beyond your normal mortgage payment without triggering a penalty, up to limits established in the mortgage contract.
Should I break my mortgage for a lower rate?
Only after comparing the interest savings with the penalty and other costs. Appraisal, legal, discharge, registration and administration fees can also apply.
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