Are you allowed to break your mortgage?
In most cases YES!
But is it worth it? Well, there can be many reasons involved in terms of breaking a mortgage. Is your goal to lower your payment or save money? Consider if it is really the best option for you. The conditions in your mortgage contract may no longer meet your needs or there might be changes in other factors for you to think about breaking your mortgage.
Reasons to break your mortgage
Look into the reasons as to why you want to break the mortgage and carefully consider what you want to accomplish.
Some of the reasons and goals could be:
- Lower Monthly Payments – Refinance when interest rates are lower.
- Purchasing a new home – When you plan to buy a new home or decide on moving.
- Equity Take – When you require Equity in your home for a myriad of different reasons.
Costs Associated
The decision you make will make a big impact on how you proceed as breaking your mortgage has cost associated with it.
The cost will depend on your type of mortgage. In most cases, if it is a fixed-rate mortgage, interest rate differential (IRD) is used to calculate the penalty and if it is a variable rate mortgage a straightforward three (3) month interest penalty is applicable.
Historically speaking breaking your mortgage to reduce monthly payments is only economical if the interest rate is at least 2% points lower than your current interest rate. In today’s low-interest-rate market this way of thinking does not hold any substance. However, maybe locking in the mortgage may make sense if you are currently in a variable product. However, in a low-interest market, it may make sense to borrow against your home to clear other debts and the penalties may be far lower than your monthly credit products payments.
The period to break-even
The break-even period is the time taken for you to pay off the costs incurred to break the mortgage. It is worth breaking a mortgage if the break-even period is two years or less. The typical strategy is to lengthen the amortization period, for instance, to break a 25-year mortgage and get a 35-year one. Each payment will be lower, but you’ll be making the payments for 10 more years, so the total cost of your home will be higher. However, this is based on your goals and aspirations with your home.
Bottomline
Breaking your mortgage comes with its fair share of pros and cons. Lower interest rate, lower monthly payments, convenience and being able to pay back faster are some of the advantages and disadvantages would be that you may end up paying more than anticipated.
Do your research and get assistance in receiving the best advice from your mortgage lender.
For any mortgage assistance contact Team Mortgage24 on (416)-242-8205
