13 January 2011
• Do you have to pay a penalty for breaking your mortgage and how much?
• Do you have to pay any administration fees?
• Do you have to pay any fees for discharging your old mortgage?
• Do you have to pay any fees for registering the new mortgage?
• Do you have to pay any fees in case of a “cash back” mortgage?
• How is your penalty calculated? (It’s based either on the posted rate at the time you signed your mortgage agreement, or on a discounted rate, if you got it).
Your mortgage agreement should include the information concerning your penalty’s calculation. Usually, it depends on your mortgage interest rate.
You may consult your mortgage broker in order to find out how big your penalty will be. Remember that the sum may vary depending on different factors: current market interest rates, your mortgage balance, and the time left before the term ends.
How can I reduce my penalty?
There’s a certain way to reduce your penalty sum – you can make a lump sum prepayment before (it’s important!) the renegotiating.
The deal is that many mortgage agreements allow prepayments without any penalties. That’s why you can reduce your penalty by making prepayments before the renegotiation – it will reduce your mortgage balance.
In some cases you have a blend-and-extend option. It means you can extend the length of your mortgage term by blend your old interest rate and the new term’s rate.
The pros and cons
Of course, when the rates go down, many borrowers start thinking about renegotiating their mortgages. But before you do so, please try to find out whether it’s really a good idea for you.
• You may get a lower rate and mortgage payments.
• If your payments stay the same you’ll be able to pay off your mortgage even sooner.
• You can get a better rate for a new mortgage term.
• If you have to pay a penalty, you may lose even more money than save on lower interest rates.
• The rates may keep falling and it means you won’t be able to get the lowest rate on the market.