9 Reasons Borrowers Break Their Mortgage Term Early.
Did you know approximately 60 percent of mortgages are broken before the term expires? While this is not necessarily avoidable, most homeowners are blissfully unaware of the penalties that can be incurred when they break their mortgage contract. Unfortunately, these penalties can be painfully expensive at times, but with some advance planning, they might be minimized or avoided.
Variable rate mortgage penalties are typically a fraction of the cost of a fixed rate penalty and are calculated at about .5% of the outstanding mortgage balance.
With a Fixed Rate mortgage, your penalty can range from around 2.75% to 4.5% or more of the mortgage balance, depending on where rates are at the time you break the term. By those numbers, on a $500,000 mortgage, the penalty would range from approximately $13,750 to $22,500, and can sometimes add up to more.
To say the least, penalties can constitute a painful surprise upon the sale of property. Many clients gravitate toward fixed rate mortgages due to the certainty of the rate, but it’s the certainty of the lower penalty on a variable rate mortgage that gives them pause.
Still, many borrowers opt for fixed rate mortgages, certain they won’t break their mortgage. But with 6 out of 10 mortgages being broken before the end of the term, it’s important to keep in mind that life happens, and having a flexible mortgage can often yield unexpected dividends.
Below are some of the most common and sometimes unexpected reasons borrowers break their mortgage term early. Being aware of these might help you plan ahead.
sale and purchase of a new home
If you already know that you will be looking at moving within the next 5 years, it is important to consider a portable mortgage. Not all mortgages are portable, so if this is a possibility in your near future, it is best to seek out a mortgage product that allows for this.
Important Note: Whenever a mortgage is ported, the borrower will need to re-qualify to ensure they can afford the “ported” mortgage based on their income and other lending criteria.
to utilize equity
Another reason to break your mortgage is to gain access to the equity in your property. In some areas, such as Toronto and Vancouver, homeowners have seen huge increases in home values. Taking out equity can help them pay off debt, expand their investment portfolio, buy a second home, help elderly parents, send kids to college, or to help them buy real estate.
to pay off debt
Credit card balances and other debt (car loans, personal loans, etc.) can be repaid at a much lower interest rate in some cases. In addition, it is much easier to manage a single monthly payment than half a dozen! When you are no longer paying the high interest rates on credit cards, you have an opportunity to get ahead on payments. Your cash flow position may also be vastly improved by lowering the applicable interest rate and minimum payment due by paying debt off with an increase to your mortgage balance.
cohabitation, marriage and/or children
Partners moving in together who need to sell one of their existing homes, sometimes causes borrowers to break existing mortgage terms.
divorce or separation
Unfortunately, as some marriages end in divorce, it can mean breaking the mortgage to divide the equity in the home. And in cases where one partner wants to buy the other out, penalties may also be incurred before one partner pays the other depending on the structure of the new mortgage. Sometimes the remaining partner does not qualify for a mortgage with their current lender and are forced to refinance with another lender to be able to stay in the home. Luckily there are many options in the market worth reviewing before making a final decision on how to proceed.
major life events
In some cases, other things happen unexpectedly including: illnesses, disability, unemployment, the death of a partner, or someone else on the title of the property. These circumstances may result in property having to be refinanced, or even sold, which can sometimes come with penalties for breaking the mortgage.
removing someone from title
Roughly 20% of parents help their children purchase a home. Often in these situations, parents go on title as well. Once their son or daughter is financially stable, secure and can qualify on their own, the parents can be removed from title.
Some lenders will allow parents to be removed from title with an administration and legal fees. However, other lenders consider changing borrowers equates to a break in the mortgage term. If you are buying a home with your child and will be on title, be mindful of the mortgage terms and how removing someone from title can potentially incur future costs.
to get a lower interest rate
Another reason for breaking your mortgage can be to obtain a lower interest rate. If interest rates go down and you want to be able to put more down on the principle, have your Mortgage Consultant review the numbers to see if it’s worthwhile to break your mortgage for the lower interest rate, considering penalties and other costs in doing so.
pay off the mortgage
You’ve won the lottery, got an inheritance, scored the world’s best job or had some other windfall of cash leaving you with the ability to pay off your mortgage early. While it may be tempting to use a windfall for an expensive trip, paying off your mortgage early can save you thousands in the long run – enough for 10 vacations. Some mortgages can be paid off in 5 years without penalties, which may be worth the wait. Your Mortgage Consultant can do a quick calculation in this respect as well.
Some of these reasons are avoidable, others are not. Contact your Mortgage Consultant today if you are planning on a purchase or if you have an existing mortgage and you’d like to see how your current or future plans may impact your mortgage. Having a plan in place in advance might just make all the difference.
Source Article: https://dominionlending.ca/mortgage-tips/9-reasons-people-break-their-mortgage