If you have a closed mortgage and decide to break your mortgage contract before the end of the term, it’s important to understand that you may be charged a prepayment charge that compensates the lender for the costs it incurs to reinvest the funds. This is why it is so important when first taking out a mortgage to think about how long you plan to be in that home.
When you sign a mortgage agreement, you are signing a contract with the lender agreeing to pay the amount borrowed at a specified interest rate over the term, or duration, of your mortgage.
There are different reasons why you may want to break the mortgage contract:
- you sell your home
- you choose to renegotiate your mortgage to take advantage of lower interest rates
- you have an opportunity to pay off your mortgage in full early, before the term ends
Information about the prepayment charge is outlined in your mortgage agreement and is typically:
- the greater of three months’ interest, or
- the interest rate differential (IRD). The IRD is the difference between the interest rate on your mortgage contract compared to the rate at which the lending institution can re-lend the money for the remaining term of your mortgage.
Banks’ commitment to providing enhanced information about mortgages ensures that you have access to information and explanations about prepayment charges. Your mortgage agreement will tell you how prepayment charges are calculated for your mortgage and will give you a formula to estimate what your prepayment charge would be. For a more exact estimate, call your lender. Please note that any estimate that your lender provides is only accurate at that time. A day or a week later, the variables used to calculate that estimate could change. For example, interest rates could change or the remaining term of the mortgage could be different. These changes affect the amount of the prepayment charge.