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Deal or No Deal: Is Breaking the Mortgage Agreement Worth It?

By: Vinay Thapliyal

Student-At-Law

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So you got a steal on purchasing a new home with your spouse and your newborn baby. A few years pass by, and the next thing you know, you welcome another child to the family. The house you purchased may be getting tight on space, and you start to consider relocating. Moving to a new home before your mortgage contract ends will result in a penalty. So is it worth breaking the mortgage agreement? Are you taking the deal on moving earlier or staying back to avoid paying extra penalties? Let’s explore the different scenarios for your mortgage agreement below:


What is a Mortgage Agreement?

A mortgage agreement is a contract between the borrower and the lender, typically called a mortgage agreement, mortgage contract, or mortgage commitment letter. The mortgage commitment letter stipulates all the promises or covenants and financial obligations that the borrower makes to the lender to secure the mortgage funds. Without paying attention to the clauses in your mortgage agreement, there can be significant consequences for breaking the mortgage contract. 


How am I Breaking the Mortgage Agreement?

Mortgage agreements vary across diverse lenders that require different conditions from borrowers. These contracts include penalties and fees for breaking the agreement on conditions such as pre-payment and early exits from the scheduled payment plan. 


Example of a Borrower Breaking the Mortgage Agreement: 

John purchased his home 2 years ago and acquired a 5-year mortgage from the bank. His family decides that it’s time to buy a bigger home and puts his house on the market. John meets with his real estate lawyer and she advises him that his current mortgage agreement with the bank includes a pre-payment condition. The condition specifies that John would face a financial penalty of 3 months interest if he pays off the mortgage before the 5-year term. He considers whether it is a good deal to move forward with following his mortgage payment plan or if he should pay the penalty interest to purchase the new property. 

Before purchasing or listing your property on the market, or choosing to refinance, make sure to revisit your mortgage agreement or mortgage commitment letter to identify which clauses limit you from engaging in any of these activities.  


Mortgage Agreement Considerations Before & After Signing

If you’ve already signed a mortgage agreement – before purchasing, listing your property on the market, or choosing to refinance – make sure to revisit your mortgage agreement or mortgage commitment letter to identify the clauses that limit you from engaging in any of these activities.

If you’re about to sign a mortgage agreement, make sure you understand all the financial obligations, legal restrictions, and permissible actions the lender provides in the contract.


Deal or No Deal?

In every situation, context matters. John may realize it’s still a good deal to break the mortgage agreement and pay the 3-month penalty to move into a bigger home for his family. On the other hand, it may be better to move into a new home after his 5-year mortgage term is completed to avoid penalties. Any borrower needs to consult with their mortgage specialist and inform them about their goals for the future.


Seeking Professional Advice

It is essential to understand what you’re committing to and whether the mortgage agreement reflects your goals as a homeowner or investor. Before commiting to the agreement, make sure to seek legal advice from a real estate lawyer who can help you understand the contract’s terms and conditions. It’s also advisable to discuss your financial goals with a mortgage agent who can help you find a mortgage plan that meets your objectives.


About TR Law Firm

If you need any real estate legal consultation, TR Law Firm helps clients prepare all documents and complete necessary steps to ensure a smooth real estate experience. Please contact us to set a virtual chat with our experienced lawyers or feel free to call us at (905) 463-2088 or email at info@pmlawyers.ca.

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