7 Reasons Why You Might Break Your Mortgage Term
During the popular 5-year mortgage term, 60% of borrowers will break their mortgage. Think about that for a second. You have a 60% chance of breaking your term and triggering an early renewal penalty. (Assuming you are in a 5-year term)
Many homeowners focus solely on the rate of their mortgage and this can be a costly mistake. Not all lenders calculate pre-payment penalties the same and its imperative you place your mortgage with a lender that offers the most flexibility. Is saving $15/month worth it when you break your mortgage term in year 3 only to get hit with a massive penalty in the tens of thousands of dollars?
The focus of this post will be on the reasons people actually break their mortgage term. Here are the top 7 reasons you might break your mortgage term.
1. Selling Your Home (upsize/downsize)
- There are many reasons a person might sell their home such as upsizing, downsizing, new job etc.
- If you are considering moving in the next 5-years, make sure your mortgage is portable (portable to another property)
- Not all mortgage lenders offer this feature, usually in exchange for a slightly lower rate (they know the penalties will make up for the slightly smaller interest payment)
2. Consolidate High-Interest Debts
- It makes sense to pay off high-interest debts such as credit cards or lines of credit to lower your monthly payments
- Increases cash-flow
- lowers your interest expenses
3. Access Equity
- Property values have risen dramatically in places like Vancouver and Toronto leaving some homeowners with large equity stakes
- Adding a home equity line of credit (HELOC) is a popular way to access equity on an as needed basis
4. Relationship Change
- If a relationship ends, the matrimonial home might need to be sold outright
- There is an option for one of the partners to keep the home and pay out the other partner as per their separation agreement
5. Unforeseen Health/Life Event
- A permanent disability could force the refinance or outright sale of a home
- Treatable illnesses such as cancer could trigger a refinance
- A death to one of the borrowers could force a similar scenario
6. Removing or Adding A Person To The Title
- It’s more common for parents to help their child qualify for a mortgage in the form of a co-signor. In the future, when their children qualify on their own, the parents will want to be removed from the title
- A marriage where one person owned property already (Adding spouse to title)
- Some lenders allow parents to be removed from Title with an administration and legal fee (no penalties)
7. Paying Off Your Mortgage
- Maybe you came into some money via the lottery, an inheritance, huge new job offer etc. You could use the newfound money to pay off your mortgage completely
- It’s important to have flexibility in your mortgage contract to avoid paying the smallest penalty should you want to repay all of your mortgage balance
As you can see, there are many reasons a person might need to break their mortgage term. These are the top 7 reasons I’ve seen as a Mortgage Broker.
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