It is not uncommon to see homeowners sell their house before the term on their mortgage contract ends. Usually this is due to a change in an individual’s family situation, such as moving closer to a new job, having additional children or seeing adult children move out. If you are a homeowner that is considering selling your house before the term on your mortgage ends, be sure to read our blog so that you can have a good understanding of what possible costs are involved in breaking your current mortgage contract.
Review The Terms Of Your Current Mortgage With Your Mortgage Broker
Reviewing the terms of your mortgage with your mortgage broker is an important step for you to take before you decide to sell your home that is under an existing mortgage contract. This is because your mortgage broker can provide you with specific information regarding the penalties associated with breaking your current mortgage contract.
If your existing mortgage is an open mortgage, you can sell your house before the term ends without incurring any penalties for breaking a mortgage contract.
If you are under a closed mortgage contract, however, be prepared to pay penalty fees when you decide to sell your home before the term on your mortgage ends. Usually, the highest cost is the prepayment penalty, or the fee that you are responsible for paying to your lender for breaking your mortgage contract. The prepayment penalty varies across different mortgage contracts, but usually costs thousands of dollars. Additionally, you will be responsible for paying administrative fees, reinvestment fees, appraisal fees, a mortgage discharge fee, and you may also have to pay back the lines of credit that you received under your existing mortgage contract.
Since the terms of a mortgage vary from lender to lender, be sure to speak with your mortgage broker so that you can have a clear picture of the specific prepayment penalties that will be applied to you. Hopefully this gives you an idea of just how costly breaking your existing mortgage contract can be.
How To Avoid Or Reduce Prepayment Penalties
If your home doesn’t meet your needs anymore and you have decided to break your existing mortgage contract, ask your mortgage broker if you can move or ‘port’ your mortgage to your new home. Under a portable mortgage, you can transfer your current mortgage terms to a new mortgage when you sell your home and buy a new one. Yes, there are fees that you will have to pay for mortgage porting, but they are significantly lower compared to prepayment penalties.
Before you decide to port your mortgage, however, you must pass the mortgage stress test in order to be approved for a new mortgage. The mortgage stress test is a financial tool used by lenders to make calculations based on higher and hypothetical interest rates in order to determine if you would still be able to make your monthly mortgage payments. Under the current stress test rules, borrowers have to show that they can pay their mortgages at an interest rate of 5.25%, rather than the former rate of 4.79%. Regardless of the percentage of the down payment, all mortgage applicants in Canada are required to pass the stress test, whether refinancing a mortgage, switching to a new lender, or porting a mortgage contract.
Partnering with various mortgage specialists and brokers, our team is here to help and provide you with additional information about selling your home before the term on your mortgage ends and how this could affect you in the future. Contact us to learn more.
