Definition: Breaking a mortgage refers to the process of terminating an existing mortgage contract before the end of its term. Homeowners may choose to break their mortgage for various reasons, such as refinancing to a lower interest rate, consolidating debt, or selling the property.
Why homeowners break a mortgage
Homeowners typically consider breaking their mortgage to benefit from changes in market conditions, such as falling interest rates, or to access equity in their property. However, it’s essential to weigh the potential savings against any costs, as breaking a mortgage often incurs financial penalties.
Costs associated with breaking a mortgage
When a mortgage is broken, lenders typically charge a penalty fee to compensate for the lost interest revenue. This fee varies by mortgage type:
- Fixed-rate mortgages often incur an Interest Rate Differential (IRD) penalty, calculated based on the difference between the original rate and the current rate for the remaining term.
- Variable-rate mortgages generally come with a three-month interest penalty, which is typically lower than the IRD fee on fixed-rate loans.
Things to consider before breaking a mortgage
Homeowners should carefully assess the total cost of penalties and any additional fees, such as legal or administrative costs, when considering breaking a mortgage. Working with a mortgage professional can help homeowners evaluate whether the financial benefits outweigh the penalties and determine if breaking the mortgage aligns with their financial goals.
Last modified: November 5, 2024
