One of the most misunderstood parts of having a mortgage is how mortgage penalties work, especially if you didn’t work with a mortgage broker. And I totally get it! Mortgage financing can feel overwhelming. But if you’re thinking about refinancing, selling, making a lump sum payment, or breaking your mortgage for any reason, keep reading.
The most common penalty I see is a prepayment mortgage penalty. And here’s the truth: your lender doesn’t actually want you to pay them back early. Your mortgage gives them a guaranteed return, so they want to be compensated when you break that agreement.
Here are the most common scenarios that trigger a penalty:
- Making a large lump sum or increasing your payments: If it goes beyond the limits of your contract, it can result in a charge.
- Switching lenders mid-term: Even if you’re transferring your mortgage to get a better rate, you’re technically breaking your agreement.
- Selling your home and paying off the mortgage early: This also counts as breaking your term, even if it’s for something exciting like upgrading to your dream home.
The size of the penalty depends on a few things:
- How much you’re paying down or breaking early
- Whether your mortgage is fixed or variable
- What the current rates are compared to your contract
So…how do you avoid mortgage penalties?
The easiest way is to wait until your term ends before making any big changes.
But if life has other plans (and let’s be honest, it often does), here are some things to consider:
- Variable rate mortgage? You most likely will only face a 3-month interest penalty.
- Making a lump sum? Check your mortgage terms—most lenders allow an annual prepayment without penalty.
- Fixed rate mortgage? This is where it gets trickier. Mortgage penalties can be high, so it’s worth crunching the numbers to see if it still makes financial sense.
On the flip side: Penalties for not paying
Missing or delaying a payment can also result in fees, and it can affect your credit. Always reach out to your lender before a payment is missed. You may be able to:
- Skip a payment
- Defer a payment
- Or set up an alternative arrangement
Some lenders even offer “payment holidays,” where you can pause payments for a few months if needed. If you’ve already missed a payment, don’t wait—catch it up as soon as possible.
Can it ever make sense to break your mortgage?
Actually, yes. If rates have dropped significantly and the long-term savings outweigh the penalty, it can be worth it. That’s where I come in—I‘ll help you run the numbers and see if it makes sense for your situation.
Worried you might need more flexibility?
If there’s a chance you’ll need to break your mortgage early—maybe you’re expecting an inheritance, moving, or your life circumstances are changing—consider an open mortgage. The rates are a bit higher, but there are no mortgage penalties for paying it off early. It can be a smart short-term strategy.
Before making any major mortgage moves, let’s talk. I’ll help you understand what’s in your current agreement, walk you through your options, and help you avoid costly surprises. My clients never go into these decisions alone—and you won’t have to either.
