You Can Break a Fixed Rate Mortgage. Is It a Good Idea?

Can you break a fixed-rate mortgage

Updated - 2022.01.27

If you’re already on a fixed-rate mortgage, you may have heard that it is possible to break it. It can be an excellent idea for some people, but it’s not always the best option. In this article, we’ll go over the many factors affecting your decision to break a fixed-rate mortgage. Let’s get started.

Can you Break a Fixed-Rate Mortgage?

Can you Break a Fixed Rate Mortgage

You are eligible to break your fixed-rate mortgage as long as the ending date set by your lender arrives. Another factor to check is the loan term completion – as long as it’s not complete, you can break the mortgage. Moreover, breaking a fixed-rate mortgage helps you save a lot on interest payments in the long run.

Most homeowners may choose to cancel their fixed-rate mortgage if market values fall and they find more advantageous interest rate options at a later date. Indeed, considering that market rates are still around record lows, you may be considering breaking your mortgage and switching to a lower rate. And besides, breaking your existing mortgage and switching to a new loan type with a lower interest might save you hundreds of dollars a year in interest payments or perhaps shorten your mortgage term (and speed up your route to ultimate homeownership) by several years.

Perform Some Math

It’s essential to remember – mortgages are complicated financial transactions with legally enforceable stipulations. Breaking one is a serious decision you should not take lightly, especially with consequences. Instead of hastily moving to break a fixed mortgage as soon as a better offer comes up, the best course of action is to take some time and perform some math. If the statistics add up (i.e., potential gains surpass potential downsides), you should contact your financial creditor to find other existing possibilities available to you. 

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Motives to Break a Fixed-Rate Mortgage

When homeowners take out a mortgage, they usually do not intend to default on the loan. However, several things can happen throughout your contract that will force you to terminate it. At other times, making a change may genuinely save you money.

The following are some of the key reasons why you might desire to terminate your mortgage contract:

  • The cost of borrowing has decreased. Even with the penalty, having a new mortgage may cut your overall expenditures.
  • You want to relocate. A new mortgage will almost certainly be necessary for individuals intending to upgrade or relocate.
  • Change in family circumstances. If you have children or go through a divorce, selling or refinancing your home might be necessary.
  • Your financial circumstances. If your finances have dropped significantly, you might opt for refinancing with an extended amortization. You could also choose to settle your mortgage earlier.
  • Your circumstances have shifted. You may need to move to another nation for work or no longer wish to own. That would necessitate selling your home and terminating your mortgage agreement.
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Are There Any Penalties for Breaking a Fixed-Rate Mortgage?

Can you Break a Fixed Rate Mortgage

The fine for defaulting on a mortgage varies depending on the type of loan and the amount owed.

There is no fee to terminate your mortgage if your mortgage is open. However, because most homeowners have a fixed mortgage, you must pay a fee.

The formula used will depend on whether your mortgage rate is variable or fixed. 

Fixed-Rate Mortgage

In most fixed-rate mortgages, lenders calculate the penalty using an interest rate differential (IRD). They subtract the current mortgage rates from the listed rates when you sign your mortgage. The result is divided by 12 and multiplied by your outstanding balance. Then multiply that by the number of months left on your contract.

Variable-Rate Mortgage

The penalty for defaulting on a variable-rate mortgage is three months’ interest.

There may be other costs to consider, like appraisal, administration, and discharge fees, regardless of if you have a fixed-rate or variable-rate mortgage. If your creditor gave you money back, you might have to pay back a portion of it.

Many internet calculators can estimate the amount of your fine. Another option could be contacting your lender, who would be able to provide you with a precise figure.

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How Can You Break a Fixed-Rate Mortgage?

As a basic guideline, the way to break a fixed-rate mortgage entails the following steps:

Establish a broad objective. Do you want to lower the overall amount of your monthly mortgage payments? Reduce the total cost of your mortgage by thousands of dollars? Change the length of time you want to offset your loan? You’ll have a much better feel of the financial possibilities you open once you better understand what you want to achieve. 

You might take a hybrid method to your savings technique here. It could involve lowering your monthly mortgage payments over the same period from one mortgage loan to another or maintaining the duplicate monthly mortgage payments while decreasing the duration it takes to pay back the loan.

Consider the amount of money you could save. At some point, the thumb rule was that if you could acquire another rate that was one or two times lower than your current rate, you should break your fixed-rate mortgage. However, rates have dropped so low recently that you may want to consider switching mortgages even if the savings aren’t significant, based on the duration of your loan. 

That’s why it’s crucial to crunch the numbers and figure out the amount you could save because – based on your mortgage payback length – even rate drops of less than a point can save you hundreds of dollars per month in interest costs.

Make an appointment with your lender. You consented to be restricted by a range of legal terms & conditions when you accepted a mortgage and signed the associated documentation. You might see a situation that indicates you’ll have to pay a fine if you terminate your mortgage before the duration of your current payment schedule is up. 

That’s correct: Even though you’re paying off your debt in full by refinancing or in cash, if you depart from the repayment plan you committed to with your creditor, you might face thousands of dollars in fines. (Because it results in lower interest costs to the creditor than expected and agreed upon.) Taking this into account, think about the conditions of your current mortgage and how much it might cost you to break your existing home loan. 

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Ups and Downs of Breaking a Fixed Rate Mortgage

 

Breaking a fixed-rate mortgage has advantages and downsides.

Pros

  • Thousands of dollars in the rate of interest savings are possible.
  • Ability to make monthly payments less expensive
  • Ability to change the length of a mortgage loan
  • Possibility of obtaining a loan with new terms and conditions

Cons

  • It is necessary to conduct preliminary studies and planning.
  • Fines and fees may build up rapidly.
  • One requires additional due diligence.
  • There may be other terms and conditions connected.
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Other Options for Breaking Your Mortgage

Can you Break a Fixed Rate Mortgage

It’s practically hard to avoid any penalties involved with terminating your mortgage except for those who have an open mortgage. So, you might have other options depending on your reasons for terminating your mortgage.

  • Stretch and blend. Some lenders might allow you to integrate your current fixed-rate mortgage with the present rate if you stretch your term.
  • Transfer your mortgage. This is when you take your current contract and port all of the terms to a new property.
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Conclusion 

As a homeowner, several things can drive you into breaking a fixed-rate mortgage. However, before you decide, you must weigh all the possibilities to save yourself from more liabilities.

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