How to Break a Mortgage in Canada
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Expect penalties if this word appears somewhere in the mortgage contract.closed image by dead_account from Fotolia.com
Determine what kind of mortgage is against the home and whether it is insured through the Canada Mortgage and Housing Corporation. The CMHC allows potential buyers to purchase a home with a down payment of less than 25 percent of the purchase price of the home. To qualify for CMHC, many financial institutions will require a closed mortgage to be signed, although there are some rare exceptions. A closed mortgage means that a certain interest rate was committed to for a short term (between one and 10 years with some lenders) and a penalty will most likely be levied to break the contract. On the opposite side, an open mortgage would mean that there is no penalty to break ahead of the agreed mortgage term for any reason. - 2
Each lender calculates penalties differently, so inquire before breaking a mortgage.Calculator image by Alhazm Salemi from Fotolia.com
Calculate the penalty through the financial institution where the mortgage is held. A closed mortgage usually incurs a penalty of either three month's interest or an Interest Rate Differential, whichever is higher at the time the homeowner wishes to break the mortgage. An IRD is calculated based on the difference between the existing rate of the contract and the current posted rate for the same term.
If "cash-back" was received at the beginning of the initial term of the mortgage, a portion of this must be paid back to the lender as per the agreement. This amount would be added on top of the normally calculated penalty. After the first interest term is completed, "cash-back" no longer needs to be repaid.
Most open mortgages carry no penalties if they are broken at any part of the interest term. As such, they usually carry a higher interest rate than closed mortgages and are often attractive to homeowners looking to sell their home quickly. - 3
Explore all options with a licensed mortgage specialist before choosing a direction.take it image by John Sfondilias from Fotolia.com
Investigate the option of "porting" a mortgage to a new property or another financial institution. "Porting" a mortgage involves carrying a loan over to a new property while the original home is being sold. Penalties are handled by the lender blending the borrower's current interest rate with the existing one and having the homeowner agree to a longer term. Many financial institutions in Canada will absorb any penalties of moving a mortgage from one lender to another as a means of attracting business. Depending upon the bank in question, these penalties are either absorbed into the new mortgage with the new lender or, in certain rare cases, waived altogether.
Outside of porting, a homeowner can also employ what's known as a "break-and-run" strategy. In this scenario, the homeowner can refinance and renegotiate a rate as a means to get money to consolidate debt or renovate by using the same blended rates method used in porting. However, to make this option worthwhile, the savings should at least be equal to the penalties incurred. - 4
Even a new contract can be broken if the homeowner is willing to pay the penalties.signing a contract image by William Berry from Fotolia.com
Sign the new mortgage contract and, if applicable, understand the new insurance terms as laid out by the CMHC. Now that the new terms are agreed upon by lender and borrower, the person breaking the mortgage would sign new documents outlining all negotiated terms and conditions, thus releasing him of the old contract. In the case of a homeowner selling a home, he will be free of the old contract as soon as closing is finalized with the new owners.
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