What is generally meant by “breaking a mortgage” is terminating a mortgage loan before the end of the term in order to enter into a new one. So, under what circumstances is this a good idea?
Some homeowners are currently having to shoulder high interest rates; however, there’s every indication that rates could fall in the coming months. If this is the case for you, you may be tempted to break your mortgage when this happens. But before you decide to go ahead, make sure you understand what this entails.
The Potential and Desired Advantages
Lower Interest Costs
Of course, the main benefit is the possibility of securing a lower interest rate. If interest rates have come down since you contracted your mortgage, it may be wise to break it in order to renegotiate more favourable terms and conditions to hopefully yield substantial savings over the long term. The difference, say, between a 6% rate and a 3% rate could come to hundreds of dollars a month.
Financial Flexibility
You could use this opportunity to adjust your loan’s terms and condition to your current financial situation. This could include such changes as a shorter amortization period to reimburse your loan faster, or more flexible payments options that meet your needs better. You could also choose to refinance a certain amount to carry out renovations, for example.
Better Options
By breaking your mortgage, you’ll be opening up new, potentially more favourable financing options. These could include switching to a fixed-rate mortgage if you had a variable-rate loan, or vice versa, depending on your financial objectives and tolerance to risk.
The Typical Drawbacks
Heavy Penalties
One of the major downsides of breaking a mortgage is the resulting fees. Lenders often impose financial penalties to compensate for potential losses incurred by ending your mortgage contract. These fees can sometimes be considerable (the larger the loan, the higher the amounts charged) and can significantly reduce the savings you could make by renegotiating your loan. Make sure you do the math!
A Tedious Process
Breaking a mortgage is generally a time-consuming administrative process. You must fill forms, negotiated with your lender, and perhaps even consult a financial advisor to ensure you’re making the best possible decision. This whole rigmarole can be stressful, especially if you’re pressed for time.
The Risks of Another Rise in Interest Rates
Finally, it’s essential that you consider the risks associated with an eventual new hike in interest rates. If they increase after you have renegotiated your mortgage, you might end up having to pay more per month compared to your initial loan, cancelling out the savings you were hoping to achieve. To avoid this scenario, make sure you take out a closed, extended-term mortgage, especially if the offered rate is very low.
Breaking a mortgage can offer significant advantages in terms of interest savings and financial flexibility; however, there are also potential disadvantages. Before making a final decision, it’s important that you weigh these factors carefully and that you consult a professional.