In the ever-evolving landscape of the Canadian mortgage market, homeowners often encounter opportunities that seem too good to pass up. One such opportunity arises when interest rates drop, leading many to wonder: Should they break their existing mortgage contract to secure a more favourable rate? Like all financial decisions, breaking a mortgage comes with its pros and cons. In this article, we’ll explore both sides to help you make an informed choice.
What Does It Mean to Break Your Mortgage?
Breaking your mortgage means that you’re choosing to end your current mortgage contract before the term is completed. This can be done for various reasons, including taking advantage of lower interest rates, selling your home, or refinancing to access home equity.
Pros of Breaking Your Mortgage
- Lower Interest Rates: The most apparent advantage is the potential for significant savings over the life of your mortgage. If rates have dropped considerably since you locked in your original mortgage, refinancing can potentially save you thousands of dollars.
- Improved Cash Flow: With a lower interest rate, your monthly mortgage payments can decrease, leaving more money in your pocket each month.
- Opportunity to Restructure: Breaking your mortgage can provide a chance to change other terms, like moving from a fixed to a variable rate, adjusting your payment frequency, or selecting a different mortgage length.
Cons of Breaking Your Mortgage
- Penalties: The most significant drawback to breaking your mortgage early is the potential penalties, which can be hefty. These penalties can vary depending on your lender and the type of mortgage you have. It’s essential to crunch the numbers to determine if the savings from a lower rate will outweigh these costs.
- Administrative Hassle: Refinancing involves paperwork, credit checks, and potentially property appraisals. The process can be time-consuming and might require additional fees.
- Loss of Specific Features: If your current mortgage has specific features or benefits that are no longer available, you might lose them when you break your mortgage.
- Interest Rate Differential (IRD): If you have a fixed-rate mortgage and interest rates have fallen, the IRD can be substantial. It’s the difference between your current mortgage rate and the rate the lender can charge today, multiplied by the amount of your mortgage and the remaining term.
Things to Consider
1. Run the Numbers: Before deciding, calculate the potential savings of the new rate and weigh them against the penalties and costs of breaking the mortgage.
2. Negotiate with Your Lender: If you’re considering breaking your mortgage due to a better rate elsewhere, talk to your current lender. They might offer a competitive rate to keep you as a customer, potentially saving you the penalties of breaking the contract.
3. Assess Future Plans: If you’re thinking of moving in the next few years, breaking your mortgage now might not make sense, as you could face penalties again when you sell.
4. Professional Advice: Consulting a mortgage professional can provide clarity. They can help assess your situation, run the numbers, and guide you to a decision that aligns with your financial goals.
Factors Influencing the Decision
As you weigh the decision to break your mortgage early, several external factors can impact your final choice:
1. Economic Environment: Beyond just the current interest rates, consider the broader economic landscape. If the economy is projected to experience significant shifts in the near future, it could influence interest rate trends and affect your decision.
2. Mortgage Market Dynamics: The Canadian mortgage market isn’t static. Lenders continuously introduce new products and services that might offer features or benefits that were not previously available. Keep a finger on the pulse of the market.
3. Your Personal Financial Health: Your financial situation might have evolved since you took out your original mortgage. Perhaps you have more disposable income, or you’ve incurred new debts. Reevaluate your financial health and determine if breaking your mortgage aligns with your current status.
4. Lender’s Reputation: If you’re considering switching to a new lender for a better rate, research their reputation. A slightly lower rate may not be worth it if the lender is known for poor customer service or hidden fees.
If you’re on the fence about breaking your mortgage, consider these alternatives:
1. Blended Rate Mortgage: Some lenders offer blended rates for customers looking to break their mortgage. This means combining your current mortgage rate with a new rate for an average that might provide some savings without incurring penalties.
2. Making Lump Sum Payments: If your goal is to save on interest costs, check if your current mortgage allows for lump sum payments without penalties. This can help you reduce the principal faster.
3. Wait and Watch: If your mortgage term is nearing its end, it might be worth waiting. The penalties tend to decrease as you get closer to the end of your term, making it more economical to switch at a later date.
Breaking your mortgage to benefit from a better rate is a significant decision with both potential rewards and risks. It’s vital to approach the choice holistically, considering both the immediate financial implications and the long-term impact on your financial journey.
Here at Remortgaging.ca, we understand the complexities of the Canadian mortgage market. We’re committed to helping homeowners make choices that align with their goals and circumstances. If you’re contemplating breaking your mortgage or have other mortgage-related inquiries, our expert team is ready to assist. Your home is more than just a property; it’s a cornerstone of your financial future. Let’s ensure you’re making the most of it.