Selling Your Home Before Your Mortgage Term Ends: What You Need to Know

There are various reasons you might choose to sell your home before your mortgage term ends, such as relocating for work, expanding your family, or downsizing. Regardless of the reason, it's important to understand the costs and implications of breaking your mortgage contract early.

Understanding the Costs

When selling your home before your mortgage term is up, the costs associated with breaking your mortgage will depend on your mortgage type:

• Open Mortgage: If you have an open mortgage, you can typically sell your home without incurring penalties for breaking the contract.
• Closed Mortgage: For closed mortgages, there are penalties involved. The most significant cost is the pre-payment penalty, which can be substantial and varies based on your mortgage terms. Additional costs may include administrative fees, appraisal fees, reinvestment fees, and a mortgage discharge fee, which removes the current mortgage charge and registers a new one.

You may also need to repay any cash-back or line of credit received when you initially secured the mortgage. These costs can add up, making it expensive to break a mortgage early.

Options for Breaking Your Mortgage

If you're considering selling your home before the mortgage term ends, you have a few options:

• Blend-and-Extend: Some lenders offer a "Blend-and-Extend" option, where you can extend the length of your mortgage and blend the old and new interest rates. This option avoids the pre-payment penalty but may come with administrative fees. However, not all lenders offer this solution.
• Breaking the Contract: If the Blend-and-Extend option is not available, breaking the mortgage contract may be necessary. This could result in a lower interest rate for your new mortgage, but you will incur pre-payment penalties. Carefully weigh the benefits of a new mortgage rate against the costs of breaking your contract.

Pros and Cons of Early Sale

Pros:

• Lower Interest Rates: You may secure a lower interest rate on your new mortgage, potentially saving money over time.
• Faster Payoff: If you keep your payments the same, you could pay off your new mortgage faster.

Cons:

• High Costs: The fees and pre-payment penalties for breaking your mortgage can be significant, potentially offsetting any savings from a lower interest rate.
• Qualification Challenges: Economic conditions may affect your ability to qualify for a new mortgage. If you’re moving into a rental, ensure the benefits of selling outweigh the costs.

Understanding Penalties

Penalties for breaking a mortgage vary depending on interest rate fluctuations. For instance, if interest rates have increased since you took out your mortgage, you may face higher penalties. Common penalty methods include calculating the difference between your mortgage’s current rate and the lender's prevailing rate (interest rate differential or IRD).

To reduce penalties, consider using any pre-payment features available in your mortgage, which may allow you to pay a portion of the mortgage early without additional costs.

Next Steps

Before making any decisions, obtain a payoff quote from your mortgage lender and calculate your home equity. Speak with a mortgage specialist and a real estate agent to gather all necessary information and ensure you understand the full financial impact of selling your home before your mortgage term ends.

By thoroughly reviewing these aspects, you can make an informed decision about whether selling your home early aligns with your financial goals and personal circumstances.