If you’ve ever wondered whether or not it’s worth it to break or transfer your mortgage, the short answer is: yes. But before you contact your broker, bank, or start hunting for a better rate, there are a few things you should know.
First off, it’s important to understand the difference between these two actions.
Breaking a mortgage, which is otherwise known as refinancing, means you’re requesting to change lenders before your renewal date has arrived. If you find a better interest rate somewhere else, you’re going to have to pay your current lender a penalty to exit your existing contract.
A mortgage transfer, on the other hand, is when you wait for your renewal date to arrive and pursue a mortgage lender other than your current one for a better interest rate.
Breaking a mortgage
Ron Butler, a mortgage broker with Toronto-based Butler Mortgage, which is licensed in Ontario, Alberta, and British Columbia, says that between 40% and 50% of all homeowners will check to see whether a competitor offers a better deal when they receive a renewal notice.
“By law, if your mortgage has reached maturity, if you move it, your existing lender cannot charge a penalty," says Butler. “The only thing your lender can charge is a discharge fee, or a statement fee, which has been agreed to when you signed your original mortgage contract.”
Typically, this fee is about $275, which, on a $400,000 mortgage, for example, isn’t very much. While there are some legal registration requirements that must be adhered to, your new (incoming) lender will cover these costs.
“It’s a minimal dollar figure to transfer a mortgage at renewal or maturity, that is normally extremely overcompensated by the savings in interest,” says Butler.
You must wait for the date of maturity to transfer, but you can prepare for it in advance by shopping around. If you opt to break your mortgage at any point prior to the maturity date, you will likely pay a much larger penalty as outlined in your contract. That penalty is usually loaded into the new mortgage.
Transferring a mortgage
Transferring a mortgage, however, is usually a pretty seamless process, since homeowners typically want to keep their mortgage terms exactly the same, including the size and the amortization schedule (time it will take to be paid off).
"Transfers are really just about the interest rate,“ says Butler, noting that somewhere between 72% and 78% of consumers consider rates to be the most important aspect of securing a mortgage.
You will, however, need to be aware of penalties for early or extra payments laid out in your mortgage contract, and whether increased monthly payments are permitted. If you want the same product, you have to be thorough in making sure that’s what you’re getting.
Compare mortgage rates
A large number of people get their mortgage renewal notice in the mail, forget about it, and do what the bank calls “approve the existing terms.” Butler says these people typically pay too much for their mortgage, when the small effort of shopping around for a better mortgage rate or simply calling the bank can often lead to saving money.
“There are lots of opportunities for people to move around,” he says. “But you still have to produce your pay stubs and everything else, and some people don’t want to bother.”
Yet the math is very clear in most cases. If your mortgage rate is reduced substantially, it’s very simple to see the thousands of dollars in savings over the long term. And if you’re returning to a bank you left in the past, there is no doubt that they’ll take your business back.
Butler does eight to 10 transfers a week, and estimates a typical bank branch will do hundreds.
“It’s an active marketplace and has been around forever,“ he says.