June 25, 2022 • Buying
Bad Breakups: Why do people break their mortgage?
By Kate Barker with Shannon Hendrikse, Accredited Mortgage Professional and Owner of Canmore Mortgage House
Buying a house is an exciting time. You’ve done your homework, you’ve found your dream home, you got your down payment, and now you’ve found a mortgage that suites your life and your needs. Everything is falling into place! The last thing you’re thinking about is what will happen if you break your mortgage contract early. But that might be a factor worth considering, especially when you’re about to sign on the dotted line.
“Statistics show that upwards to 70% of people break their mortgage before the end of their 5 year term,” says Shannon Hendrikse, Accredited Mortgage Professional and Owner of Canmore Mortgage House.
But how can that be? What could cause your perfect mortgage plan to get sidelined so quickly? Let’s look at some common factors that lead people to break their mortgage, as well as some things to consider if you find yourself in one of these situations.
Homeowners may want to access their home’s equity: that amount between the market value of the home and your mortgage balance owing. Since it is usually the lowest cost option for financing, it can be a great option to explore for consolidating debt, financing home renovation projects, or to use as a down payment on another property. If there is sufficient equity available, it can be accessed in a variety of ways and sometimes the most cost-effective solution involves breaking your existing mortgage.
Mortgage Tip: Consider the amount of equity you’re looking to access and the time frame you’d reasonably expect to carry this additional balance. Your broker can help with a cost-benefit analysis to determine the most beneficial way to structure this. Not all lenders and mortgage products offer the option to refinance your mortgage mid-term, so make sure you ask these questions up-front.
Moving out of the Valley
Banff and Canmore are known to be transient towns. With Banff’s “Need to Reside” policy, a job loss can result in the need to move, as can many other factors including family commitments, better job opportunities, lower cost of living, and potentially greater stability. Living in the Bow Valley is a dream for so many people, but it can often be out of reach for a variety of factors. With the sharp increase in housing prices, some people have realized significant return on their investment by selling their home, breaking their mortgage early, and purchasing in a lower priced market outside the valley.
Mortgage Tip: Consider what could pull you away from the mountains and what that might do to your housing situation. Are you able to ‘port’ your mortgage and avoid paying a penalty? Does your lender allow you to convert your home into a rental property? Take a look at your options and consider a mortgage with some flexibility, in case you need to make some big moves.
“Five years is a long time. I’m working with a lot of clients lately who haven’t yet reached the end of their 5 year term, but have had a change in circumstances and now need advice,” says Hendrikse. A lot can happen in five years. Think back to who you were in 2017 and ask yourself, is everything the same now as it was then? While no one wants to think about marital separations as a factor when signing a mortgage, the reality is this is a common reason people break their contracts, and depending on a few contributing factors, they may be faced with hefty financial penalties on top of the emotional stress.
Mortgage Tip: While it is never something that couples ‘plan for’, consider discussing with your partner how you’d handle a separation, and what that would look like for your house and mortgage. Would you agree to sell the house and split the proceeds? Would one partner ‘buy out’ the other? Having a backup plan with some general expectations will make these transitions easier if the situation arises and will help remove some of the emotions from the decision making.
Nobody wants to think their steady job will suddenly come to an end, but if there’s one thing we learned from the pandemic, everything can change in an instant. Your original mortgage approval is based on your guaranteed income, and the percentage that can go toward housing expenses and other debts each month. If that income suddenly stops, especially if you don’t have new employment shortly thereafter, you may struggle to make your payments. It makes sense to renegotiate the terms of your mortgage, but without the income needed to qualify, this can be difficult. You might need to consider selling, which often means breaking your mortgage before the end of your term.
Mortgage Tip: Do your best to find a mortgage that best suits your situation, but keep in mind that situation could change. Make sure you understand what flexible features your mortgage might offer if faced with an unlikely situation. It might also be worth considering mortgage protection insurance that could help you if you become disabled or lose your job.
Sometimes it could make financial sense to break your mortgage to take advantage of lower rates. As rates dropped during Covid, many people wanted to make the change to save money in the long run. It’s important to look at all the factors, including your penalties for breaking your mortgage and taking advantage of the lower rate. Are you actually going to save money by doing this? Are the long-term savings worth the short-term penalty? This may make financial sense in some situations, but it may not in others.
Mortgage Tip: Talk to your broker for neutral advice about what options might be available for your situation. A good broker has a wealth of knowledge that can help take the guess work out of the decision. They can also be a sounding board to discuss the long-term implications and they may likely present you with options you hadn’t even considered.