How to avoid a mortgage penalty in Canada?
For any number of reasons, homeowners within a mortgage term might find a need to break their mortgage. Others might have extra income to prepay their mortgage term. However, you may be shocked to learn about the steep penalty fees associated with prepaying or breaking a mortgage. With proper planning, research, and assistance, it is possible to minimize or avoid these fees entirely. We have collected information about avoiding a mortgage penalty in Canada or paying as little as possible.
What are mortgage penalties and why are they so high?
Mortgage penalties are fees put in place by lenders to discourage borrowers from paying back their owed amount before their term ends. You may believe that lenders would be happy to receive their money back earlier than expected. Instead, lenders want their borrowers to follow the payment schedule because they want the interest that accumulates over time. So by charging mortgage penalties, lenders can compensate for their losses. Since many homeowners do not break their mortgage term or sell their homes prematurely, mortgage penalties are often forgotten. If you consider buying a new home or getting a different mortgage, it is essential to ask your lender about the penalties associated with the agreement to know them thoroughly.
Is there a way to avoid mortgage penalties?
Mortgage penalties are often astronomically high, which is why so many homeowners want to know how to avoid them when breaking their mortgage. It’s not always clear what options are available, and the choices you can make depend on your mortgage term. For example, there are a few ways to avoid mortgage penalties, but you must plan and take action before signing the mortgage agreement. Here are some of the ways you can get out of a mortgage with a minimum or zero penalty fee:
Opt for an open mortgage
One of the ways to avoid a mortgage penalty is to get an open mortgage instead of a closed one. An open mortgage is specifically designed to allow the borrower to break the agreement or prepay the owed amount with no penalty. The tradeoff is that lenders will charge you noticeably higher interest rates, and some lenders do not offer open mortgages at all. If you foresee needing to break your mortgage sooner or pay it off early, it is safer to choose an open mortgage.
Select a shorter mortgage term
Most homebuyers prefer to take longer mortgage terms because it reduces their monthly payments. It is a good option if you have no plans to sell the house before the mortgage reaches maturity, but if you plan to sell or upsize earlier, selecting a shorter term is the way to go. A shorter mortgage term means you are locked into your mortgage for less time. You can often postpone your new home purchase just enough to finish your mortgage term. After the mortgage term ends, you can choose to sell the home instead of renewing your mortgage, and you will not be on the hook for any penalties.
Pay the maximum prepayment amount possible
While lenders don’t want you to prepay your mortgage all at once, most will allow you to pay extra up to a specific annual limit without any repercussions. When determining how to get out of a mortgage without penalty, consider paying it off as soon as possible within your agreement limits.
Port your mortgage
Porting your mortgage is a great option to save on penalty fees. You can take your existing mortgage and its interest rate, due amount, and term end date to your new house. As your mortgage remains intact, you are not technically breaking your agreement, and you can avoid a penalty fee. This is usually the best option for homeowners looking to downsize since your mortgage and paid amount will most likely cover the cost of your new home. However, if you want to upgrade your home to a larger, more expensive one, the next option is for you.
Blend and extend your mortgage
Porting your mortgage is an excellent option to save penalties, but most of the time, the mortgage amount of your new home may be higher than your existing one. Most homeowners prefer buying houses bigger than their current homes because real estate appreciation naturally makes prices go up over time. When this happens, you will need another mortgage for the remaining amount. But you do not have to get a second mortgage; most lenders will offer you a “blend and extend” mortgage. Your lender will adjust your mortgage details according to a weighted average between the old home and the new home, providing you with a new mortgage plan without any term break penalty.
Have the buyer assume your mortgage
This option entirely depends on whether your lender is willing to allow it and the buyer’s financial situation. Essentially, you would transfer your mortgage to the buyer. The buyer inherits the mortgage and its interest rate, mortgage balance, and term duration. Many factors can make this less than ideal for lenders, but this is worth exploring if you want to avoid a mortgage penalty.
If you are looking to avoid a mortgage penalty, the above strategies can be good options to help save you money. However, the simplest and easiest way to prevent mortgage penalties is planning and seeking financial assistance. Alpine Credits can help you leverage your home equity to achieve your financial goals. Contact us today to learn more about what we can do for you.