Homeowners are seen facing scenarios that makes them break an existing mortgage contract before time. If you find yourself in the same zone and want to break your contract, talk to your RBC mortgage specialist in Richmond Hill before making any decision about your home in the area. There are a lot of things to take care of when you wish to break the mortgage contract and we have git you all the basic information about the same in this blog.
Be it for any reason, such as selling the home, renegotiate, paying it off before the term or finding a better rate, there are consequences that you will have to deal with while breaking the contract. If you are breaking the contract before the renewal, you will have to bear the costs involved in the process. It may possible when you find the current mortgage contract is not suits with you. And you want to renegotiate it with your lenders or banks. But what is the procedure to break the old contract and replace the new one? How much you have to pay if you break your contract? Let’s talk about the costs.
What are the costs involved in breaking your mortgage contract?
There are some significant costs involved when breaking a mortgage contract, such as:
- Appraisal fee
- Re-registration fee
- Administration fee
- Re-investigation fee
- Prepayment penalty
All mortgage brokers suggest their client to go through the document which the lenders or the bank provide while the clients apply for loan to buy a new home. You can ask your lenders or mortgage specialist if breaking of contract is an option. So, the loan borrower should consider these things carefully that all the costs are involved with the loan.
The costs you will have to pay depends on your reasons of breaking the contract. For example, when you attempt breaking the contract early, you will have to pay prepayment penalties. These are fees one has to pay to get free from the contract.
If you wish to break the mortgage contract before renewal and your lenders allow it, you will usually have to charge for prepayment penalty. This fee differs for each borrower on the basis of the type of mortgage and other relevant details.
It is up to the lenders, how much he/she will charge as penalty. The lenders may agree to reduce the penalty but you can’t find the new lender for the same reason. You have to plan with a new mortgage contract with the same lender.
Also, you have to pay the cash back amount when you first got mortgage loan from the lenders or banks.
If you have signed a variable –rate mortgage, you will have to pay the interest payments of three months on your current balance to go free from the contract. Calculate the amount and talk to your mortgage specialist about the payment procedure. Though your mortgage lenders will provide you all the details before breaking your existing mortgage loan.
To calculate the amount to be paid as prepayment penalties, multiply your interest rate with the current mortgage balance. Take that sum and multiple it by 3.
Prepayment penalty = Interest Rate X Current Mortgage Balance X 3 (three months)
If you have signed a fixed-rate mortgage, the calculation gets a little complicated. Your mortgage socialist will ask you to pay either the 3 months interest amount or the interest rate differential, whichever is higher.
Now, many homeowners get confused in calculating the interest rate differential. It is calculated by subtracting the current market rate from the fixed interest rate. Then, take the calculated amount and multiply it by the number of remaining months on your mortgage contract.
Prepayment penalty = (mortgage interest rate – current market rate) X current mortgage balance X remaining months on the mortgage contract.
Before doing the calculation, talk to your mortgage specialist about their prepayment penalty policies.
Is it possible to avoid prepayment penalty?
Not completely, but you can get some relaxation in the financial cost involved in breaking a mortgage contract. Read on.
1. Understand your contract
Read the contract papers carefully before signing it and understand the prepayment penalty clauses properly. If you are not sure about the meaning, you can ask your mortgage specialist for help or someone you trust. There are some contracts having a clause that allows you to pay a part of of your mortgage debt annually without paying any penalty. Look for this option in your contact as it can save you from paying the prepayment penalty.
2. Blend and extend mortgage
In case you want to avoid any penalty and still break the contract, ask your lender or mortgage broker about the blend and extend option. Using this option, the old mortgage interest rate is blend with the new rate to find you a rate in between. Discuss the calculation procedure with your mortgage specialist and understand if it is a good option for you economically.
3. Get your mortgage assumed
If the reason behind breaking the contract is resale, you need your new buyer to assume your mortgage. That being said, the new buyer will take over the existing mortgage, and you will be free. However, this also needs a clear discussion with the lender/specialist.
4. Port your mortgage
If you want to buy a mortgage and so want to break the existing contract, you can talk about it with your RBC mortgage specialist in Richmond Hill and port your mortgage. Porting your mortgage means taking it with you to the new home, However, there are certain rules to implement this option which your lender will explain to you.
To break your mortgage, a lot of things are to be considered, including the fees and costs to be paid. You can find other lenders who can offer you a lower interest rate. It may not be the best financial solution, but you will have some economical options to break the mortgage contract and save the money.