You just bought yourself that wonderful piece of property you have considered as your life achievement. You put in the effort of paying your monthly amortization and are looking forward to enjoying your house to the fullest soon.
Then one day, you wake up and realize that your monthly payments are gradually draining your savings and making you feel lethargic every day.
You begin to re-assess your situation and come to the conclusion that you are working your life away so that you can pay off your mortgage loan on time. You finally decide that your mortgage loan has to be settled in full even before its designated term.
“How will I do this?” you ask yourself while reading through your mortgage contract and feeling anxious about what you are planning to do.
Today’s blog will briefly discuss how getting out of your mortgage will affect your standing with your lenders.
We will also tackle some issues involved with this and advise homeowners like you to act wisely and carefully reconsider this course of action before committing to it.
If your nerves are all settled right now then let us proceed…
Breaking Out from Mortgage Definition
Getting out of a mortgage – or breaking away from it – is a course of action where home buyers will force to end their mortgage contract with their lender by paying off or settling their outstanding balance in full to cease their financial obligations with the latter sooner than expected.
The thought of being able to fully pay up what is due to your lenders is a grand idea: no creditor will ever get disappointed with anyone who will pay off their dues at an earlier date. ALL lenders will laud this decision and consider this as a sign of ABSOLUTE RESPONSIBILITY and MATURITY on the part of the borrower.
If this is always the case then both borrower and creditor will be the best of friends, right? Well…NO!
There are legal implications involved once a homebuyer – YOU – decides to abruptly end the mortgage contract with a private home mortgage agency. Don’t even be surprised if your lender will raise an eyebrow and question your motives about this daring move against them.
You read that last sentence right: they will hold this against you because you have caused them to lose money in their investment.
Entering into a mortgage loan contract with a lender is a stake that the latter placed against your property; hence, by paying your monthly amortization on time, they will earn a certain amount of interest per month that – upon the maturity of your mortgage contract – can be deemed “fully
realizable” (per accounting terminology) together with the principal amount (the original amount you borrowed).
If this contract is disrupted – or violated – then you will be penalized depending on the terms outlined in your mortgage agreement.
(NOTE: The penalty to be imposed on the homeowner is dependent on the lender’s conditions stipulated in the latter’s loan contract.)
There are two main types of penalty for getting out of (or from a) mortgage agreement: (1) IRD – Interest Rate Differential and (2) 3-Months Interest.
If you have a fixed mortgage interest rate then the bigger penalty computed from the two above-mentioned types will be imposed upon you. On the other hand, if you have a variable mortgage interest rate then only the 3-months interest will be imposed instead.
As you can glean from the above, your situation tends to get worse and your finances can and will suffer since your penalties will be more than a handful most especially if your mortgage loan is big (i.e. $500,000.00 and above).
(NOTE: Remember that your private home loan rates are directly proportional to the amount of loan you borrowed; hence, think more than twice about deciding to break out from your mortgage. The higher the loanable amount given, the higher the penalty due to the interest rate computed against it.)
Clauses of Concern
Aside from the types of penalties, you also have to contend with your respective mortgage agreement’s clauses. This is a concern for you since this will dictate what will happen to your loan contract if you pursue to continue with your plan to step out from your current lien.
We are going to mention in passing two clauses that will affect your option: (1) Bona-fide Sales Clause and (2) No Port Option.
Bona-fide sales clause is direct-to-the-point in its nature. Bona-fide is Latin for “in good faith” or “true” which, in a mortgage agreement, means the actual terms stipulated in the agreement will be enforced if and when a breach occurs against it.
In your case, your intention to break off from your mortgage already constitutes a breach of contract (although not that serious a breach that will land in prison). As such, if you pursue this route then your only recourse is to sell your property first before you can pay off your mortgage during its term.
This is your penalty and since your agreement had been drafted “in good faith” then it is only proper that the lender will force you to SELL off your property FIRST for its actual value. Afterward, you are allowed to settle your loan balance in full even IN THE DURATION OF ITS TERM to finally terminate it.
The no port option, on the other hand, obviously states that you are not allowed to port or to transfer your mortgage to another property if you choose to sell your house DURING YOUR LOAN AGREEMENT’S TERM.
Both are sticky situations you have to carefully look into to avoid further complications from your private home loan providers . Do your research properly and be vigilant of your mortgage contract policies and their specific termination procedures.
Portable Mortgage: A Rare Gem in Your Agreement
You are in the best of luck if your mortgage contract allows portability. This means that you are allowed to move or apply your current mortgage – inclusive of its current interest rate(s) – to your new property.
This results in you having absolutely NO MORTGAGE PENALTIES to pay should you decide to transfer to your new residence.
Getting out of your mortgage contract is not easy as you think. Paying off your mortgage loan in full is your best option to relieve financial pressure.
However, there are pitfalls you have to contend with and it pays for you to be knowledgeable about them. Study intently your mortgage contract before inking your commitment to it.
When the time comes and you are considering pre-terminating your contract, your wisest move to do is to approach your lender and have a word with them about your plan.
It is not worth it if you end up losing both your house and your money in the end.
We are your Oshawa experts in mortgage advisory services and credit score restructuring for 9 years running. Our satellite offices are spread across Canada and we offer financial restructuring as well as credit assistance to many of our clients.
Contact us at (416) 825 0142 or send an email to [email protected] today for more information.