Five years is the standard length of a mortgage term. Once your term is up, you gain a lot of flexibility to change things up, but until then, most agreements leave little room for flexibility. Unfortunately, the life events that can prompt the need for breaking and refinancing your mortgage rarely line up with the end of your term. The reality of it is, a lot can happen in 5 years. Job changes, divorce and unexpected moves are all things that can come and go in much less than 5 years– which means you may have to break your mortgage to accommodate these changes.
So, in the face of the unknown, what can you do? It is important to take note of lender policies around breaking your mortgage before the end of your term. For many, this may seem like an unnecessary worry based on something that is unlikely to happen, but you wouldn’t be the first, nor the last to get burned when life throws an unexpected curve ball.
Penalties can be as high as 4 percent of the principal.
Four percent doesn’t seem like a lot, but when you put it in the context of a mortgage with a remaining balance of $250,000, that’s $10,000 straight out of your pocket at a time where you may already be financially strained. On the other side of the spectrum, some lenders use a more client-friendly way to calculate their penalties. These lenders are often referred to as “fair penalty lenders”. Obviously “fair” is a subjective term, but it this case, it means the amount you are paying is tied to the amount of interest that you would have paid during the remainder of the term, had you stayed in your contract.
In contrast, the standard for non fair-penalty lenders is an inflated percentage of your remaining balance that acts like a punishment to dissuade people from breaking their contract mid-term. We often see this more costly model used by the big banks. In the past, big banks have been able to use these large penalties because of the perception that the best place to get your mortgage is where you have your bank accounts. This has become an outdated way of thinking that usually ends up costing people more compared to those who looked into the many other reputable lenders out there with other options.
So, when you are discussing your mortgage must-haves with your mortgage broker, using a fair-penalty lender should definitely be somewhere on your list. It is understandable that items like rate or amortization length might be prioritized, but keep in mind that saving a fraction of a percent over the term might not outweigh paying thousands more in penalties should you need to break you mortgage agreement.
All in all, it is pretty much impossible to fully avoid the risk of a penalty if you need to break your mortgage, but there are very real ways to minimize how much that penalty is going to cost you. A good mortgage broker will help you weigh your options based on your financial situation and give you the information to make an educated choice- ensuring you feel prepared no matter what.