Check the fine print before breaking your
mortgage
A job transfer, a divorce or some other change in financial circumstances can leave you with a mortgage you no longer want or can afford. So, what happens if you need to break your mortgage?
Chartered Accountant Robyn Negin is a licensed mortgage agent with Dominion Lending Centers Mortgage Connection in Toronto. Breaking a mortgage should never be a casual undertaking, she says, as there will almost certainly be costs and penalties. Your best strategy is to fully read and understand all the fine print before you sign the loan papers, so you can build in some wiggle room at the beginning.
But hindsight is twenty-twenty. Should you find yourself needing – or wanting – to break your mortgage, here are some things Negin suggests you consider.
Tax breaks may help cover the costs – If you’re breaking a mortgage because you need to move for work, there may be some financial help available. With intra-company transfers, your employer may cover the costs as part of your moving expenses. Or, if you’re moving to start a new job or to be significantly closer to your work, the fees may be tax-deductible. More details are available on the Canada Revenue Agency website at http://www.cra-arc.gc.ca.
Do some homework – If someone offered you $10,000 to make a few phone calls, or spend a few hours researching mortgage rates online, would you do it? Shopping around for a mortgage could easily save you that much over its lifetime. So if you’re considering breaking your mortgage to get a better deal on the financing, be sure to look – thoroughly – before you leap.
Check the fine print, and the math – Often, Negin says, the calculations used to determine the penalties of breaking a mortgage are not properly disclosed to clients. Further, different lenders calculate the penalties differently. Some use posted rates, some use discounted rates, and some will only let you break a mortgage if there’s a bona fide sale to replace it.
Amortization rules have changed – Last year, new rules were introduced that limited amortization periods to 30 years instead of 35. While this prudent measure may help prevent homebuyers from overextending themselves, it also has implications for property or real estate investors, who may want to divide costs over the longest period possible. Make sure you know how this may affect you before you break your existing mortgage.
Paying late tarnishes your credit rating – Don’t sign on for bigger payments than you can comfortably afford. If you fall behind, or even are occasionally late with a payment, your credit rating will suffer. That can place you at a whole different risk level for financing purposes, and mortgage packages or preferential rates for which you might have once qualified may be lost. Any gains you may have made with the higher payments will now go to paying higher interest rates.
Know the costs – Most fixed-rate mortgages have a standard charge for breaking them, which is the greater of either (a) three months interest penalties or (b) the interest rate differential between the old and new rates. But other mortgage agreements may have collateral charges that must be satisfied, especially if you’re breaking the mortgage to change to a different lender. Legal fees may also be involved. Negin says it’s quite possible that none of this was clearly explained or fully disclosed to you at the time you signed the mortgage papers, either.
Try to blend and extend – For a plan with a five-year term, many mortgagees will consider refinancing around the four-year mark, Negin says. She suggests you find out if your lender will let you “blend and extend”. With the right circumstances, timing and interest rates, they may offer you a better rate for a longer period, which may make the mortgage-breaking penalties worthwhile.
Make friends with your broker – For the best handle on the rates you pay for a mortgage, Negin suggests you stay in touch with your broker. He or she will keep you in the loop, watch out for good deals and keep you apprised of the bigger financial picture. Your broker will also help you evaluate the pros and cons, so you can make an informed decision as to whether it’s better to break the mortgage, pay the penalty and get a lower rate, or stay with the one you have because the costs outweigh the benefits. You’ll then be in the best position possible to take advantage of timing – one of the best and biggest advantages you can have if ever you want to break your mortgage.
Brought to you by The Institute of Chartered Accountants of Ontario
