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Mortgage Penalties & Breaking Your Mortgage

Q: What is a mortgage prepayment penalty?

A mortgage prepayment penalty is a fee a lender may charge if you repay more of your mortgage than your agreement permits. This can include breaking a closed mortgage before maturity, switching lenders early, paying off the mortgage when selling a home or exceeding the prepayment limits in your mortgage agreement.

Q: Can I break my mortgage without a penalty?

Open mortgages generally provide greater flexibility to repay the mortgage without a prepayment penalty. Closed mortgages typically restrict how much can be prepaid without charge. The exact rules and any applicable penalty are determined by the mortgage contract.

Q: What is a mortgage prepayment privilege?

A mortgage prepayment privilege allows a borrower to make additional payments beyond the normal scheduled mortgage payment without triggering a penalty, up to the limits established in the mortgage agreement.

Q: Should I break my mortgage for a lower rate?

Only after comparing the potential interest savings with the mortgage penalty and any other costs involved. Appraisal, legal, discharge, registration and administration fees may also apply. The complete financial impact should be reviewed rather than comparing interest rates alone.

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.

Why Work With Haystax Mortgage?

More than one lender. More than one option.

A bank can generally offer you its own mortgage products. A mortgage brokerage can explore options from a broader range of lenders.

But access to lenders is only part of the value.

A Haystax Mortgage professional can help you understand:

how different mortgage structures compare
which lender requirements may fit your situation
the trade-offs between rate and flexibility
penalties and prepayment privileges
how your mortgage fits your longer-term financial plans

You're at HOME with Haystax!

FIND A HAYSTAX MORTGAGE PROFESSIONAL

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.