Breaking Your Mortgage: Reasons It May Happen
To “break your mortgage” means that you are trying to renegotiate the terms of your mortgage before your renewal/maturity date. While there is no publicly available data, industry professionals estimate that around 60% of borrowers will break their mortgage early and tend to do so after 3 years. Most people take out a 5-year mortgage, which means they are breaking around 2 years early.
There’s many reasons this could happen, here are some common ones we see:
- Rates have fallen significantly and borrowers want to lock in a lower rate
- A new addition to the family is expected (or unexpected) and borrowers need to move to a bigger home
- A new job has come up and borrowers need to move to another location
- The borrower needs to refinance (read why people refinance to learn more), most commonly to pull money out of their home or to lower their mortgage payments
Steps To Breaking Your Mortgage
Step 1: Confirm The Costs
Penalty calculations will vary wildly by lender and the only way to know for certain is by calling your lender to get a quote for your total penalties, fees, etc involved with breaking your mortgage. Within your Perch profile, we lay out the contact details and estimated penalties based on your lender inputs.
Note that your final charges aren’t determined until a payout statement is requested, so this quote could change prior to your closing date.
Step 2: Determine Your Options
This is essentially the same process as getting pre-approved to buy a home. You review everything with your mortgage professional and see if you could qualify at another lender. Your mortgage professional should help you consider options that are either with your current lender (porting your mortgage, refinancing with the same lender, etc) or with other lenders.
Step 3: Make An Informed Decision
You shouldn’t make a decision until you’ve clearly mapped out steps 1 and 2. The most common mistake we see is when borrowers become fixated on having to pay no penalty upfront. Lenders are aware of this and will commonly offer to waive or reduce the penalty if you stay with them at a high rate. Don’t fall for this trap.
At Perch, through our network of lenders and low cost model we have the ability to get our borrowers cashback as high as 5.6% of their mortgage balance. This is almost always enough to fully cover your penalty, enabling you to pay nothing upfront and still get a better rate.
Step 4: Submit A Mortgage Application
The application process is almost identical to what you went through when purchasing your home, but a lot more simple. None of the purchase documentation is required (signed purchase agreement, MLS listing, etc.) and no down payment documentation is required, so it’s usually just the basic income documents and your current property statements (property taxes, condo fees and mortgage statement).
On top of being more simple than purchasing a property, it’s also less expensive. In most cases, your legal and appraisal costs (if required) are covered by the lender. So all in, you just need to cover any penalties or discharge fees associated with leaving your breaking your mortgage early. From start to finish, at Perch we estimate that in total our clients will spend roughly 1 hour to switch lenders.
Looking At The Full Picture
If you’re able to get the best deal from your existing lender, staying put is less hassle than moving and we encourage our clients to go down that path if it’s possible. However, we find that this is rarely the case and all it takes is 1 hour of your time through Perch to potentially save thousands of dollars.