Ontario Mortgage Pulse: Mortgage Penalties Explained – Is Breaking Your Mortgage Worth It in 2024?

Mortgage rates in Ontario have shifted, and many homeowners are considering breaking their current mortgage to take advantage of lower rates. However, breaking your mortgage comes with penalties that can impact your financial bottom line. Here’s what you need to know about mortgage penalties and when it might be worth it.

What Are Mortgage Penalties?

A mortgage penalty is a fee charged by your lender when you break your mortgage before the term ends. Breaking a mortgage typically happens when:

• You sell your home and don’t port your mortgage.
• You refinance to secure a better rate or access equity.

The penalty amount depends on your mortgage type (fixed or variable) and your lender’s policies.

How Are Penalties Calculated?

1. Variable-Rate Mortgages: Penalties for breaking a variable-rate mortgage are typically calculated as three months’ interest on the remaining balance.
2. Fixed-Rate Mortgages: Fixed-rate mortgage penalties are usually calculated using the Interest Rate Differential (IRD) or three months’ interest, whichever is higher. The IRD compares your current rate with the lender’s posted rate for the remaining term.

When Is It Worth Breaking Your Mortgage?

Breaking your mortgage can be worth it if the long-term savings outweigh the penalty. Here’s when it might make sense:

1. Significantly Lower Interest Rates: If refinancing at a lower rate saves you thousands over the term, it may justify the penalty cost.
2. Accessing Equity: Refinancing to consolidate high-interest debt or fund investments could improve your financial position despite the penalty.
3. Major Life Changes: Selling due to relocation, downsizing, or upsizing may require breaking your mortgage.

Steps to Determine If It’s Worth It

1. Use a Mortgage Penalty Calculator: Many lenders and brokers offer tools to estimate penalties.
2. Consult a Mortgage Professional: A professional can analyze your financial situation and help you determine whether breaking your mortgage is a smart move.
3. Compare Total Costs and Savings: Factor in penalties, new interest rates, and any refinancing fees to assess the net benefit.

What Should You Do Next?

Before making a decision, consult a mortgage professional who can guide you through the process and provide a detailed cost-benefit analysis. Breaking a mortgage is a significant financial decision, and expert advice can ensure you make the best choice for your goals.

Sources:

• Ratehub: ratehub.ca
• CMHC: cmhc-schl.gc.ca
• Canadian Mortgage Trends: canadianmortgagetrends.com