August 03, 2014
Deciding to break out of your mortgage can be a complicated and painful task. I have seen many people who are reluctant to pay the penalty fee because it often cost thousands. Yet, it would save them much more if they do break out.
I have also seen many people miscalculate the savings and cost to break out of their current mortgage.
To keep it simple, if your mortgage interest, whether fixed or variable is about 2% higher than the rate you can get approved today including variable, then given today's financial conditions, you should break out of it. For example, if your mortgage interest rate is 4% and the approved lender variable or fixed rate is 2%, then you should break out of it. Using simplified math, a $200 000 mortgage at 4% is around $8000 in interest where at 2% is only $4000 in interest. Doing so, cuts your mortgage interest amount in half each year.
This is a very general rule of thumb and there are always exceptions to these rules that you need address. I do not know your conditions personally, but if you post your situation, I may be able to answer it.
The procedure is complicated. First the current lender is reluctant to break out of the mortgage. Thankfully there are laws in Canada that force the lenders to behave. However, you, as the client, need to do your part to make sure all parties are following the process.
Assuming you are breaking out of the mortgage from your current lender and going with another lender...
1. After you have minimized the penalty fee by making the largest prepayment, your new lender should fax a discharge request to the current lender.
2. After this fax, you should contact the current lender and make sure the fax has been received. Often times, lenders fail to receive such fax. (Whether intentionally or accidentally to delay the mortgage exchange process))
3. After the current lender acknowledges the request to discharge has been received, then the current lender has forty-eight hours to respond with the mortgage break out fee, which would be the cost to break out of the mortgage. Often times, lenders would claim they need longer than forty-eight hours, but the law does stipulate forty-eight hours.
4. Once the mortgage break out fee is faxed back to the new lender, you need to contact the new lender and make sure the break out fee is the fee you expected. Lender tend to change the fee and up the fee suddenly. (Whether by accident or intentionally.)
5. Once the mortgage break out fee is acknowledged, the new lender would then get you to sign and make the change.
Once that occurs, the mortgage exchange process is complete..
One may believe their mortgage broker should advise you on this, but the truth is, they won't. In fact they want you to know as little as possible so that you can only listen to them. The mortgage broker has their own agenda. It is only in the best interest of the mortgage broker that you break out of the mortgage, so that he can collect the commissions with the new mortgage. Also, if you do use a mortgage broker, all fees will be paid by you.