Looking at your current mortgage you may find that the current terms and conditions no longer meets your needs. Research has shown that over 80 percent of people break their mortgages early. So if you are thinking about changing the terms and conditions of your mortgage contract before the end of your term, you will need to renegotiate your mortgage contract.
People need to break a mortgage for a variety of reasons. Some of the most common include:
· Sale and purchase of a new home *without a portable mortgage
· To take equity out/refinance
· Relationship changes (ex. Divorce)
· Health challenges or life circumstances are altered
When you renegotiate your mortgage contract you break your mortgage contract and replace it with a new one. A mortgage penalty is a fee built into the contract to prevent or make it difficult for you to break the mortgage, in addition to compensating the provider for the loss of interest income.Different mortgage providers calculate the penalty in different ways, as this is why it is always a good reason to shop around before you finally decide on your mortgage.
How mortgage penalties are calculated
Traditionally, banks and other lenders have used two main methods to calculate mortgage penalties. This means that in the past, you were assured of paying a standardised penalty depending on which method the bank used. As a rule, you could then expect to pay the greater sum calculated under the following methods:
The three month interest method: Here, you basically calculate the interest due on your next three mortgage repayments and pay the three month total.
Interest Rate Differential (IRD): The IRD is calculated by multiplying your mortgage balance by the difference between your original mortgage interest rate and the current interest rate that the lender can expect to charge upon reselling the mortgage.
Taking out a mortgage is a great way to get to getting a home. However, life can change and so can some circumstances, a desire to move somewhere else (possibly closer to work), or simply wanting to access additional equity can force you to break your mortgage contract early. However by breaking a mortgage early can result in hefty penalties from your mortgage lender. Canadian mortgage laws are yet to regulate how the mortgage penalties are calculated, which means that many people find themselves at the mercy of mortgage providers as far as penalties are concerned.
Luckily, there are a few tips you can take to protect yourself from hefty penalties or at least reduce the amounts you pay upon breaking your mortgage by a significant amount. With a little research, you should be able to discover the methods that work best for you. It is important to ensure that you work with a trusted mortgage professional who can help explain the terms of your mortgage commitment to you, and address your concerns about the associated penalties should you decide to break the mortgage down the road.