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Understanding Mortgage Penalties: Why They Exist When Breaking a Mortgage Early

Understanding Mortgage Penalties: Why They Exist When Breaking a Mortgage Early

Breaking a mortgage before its term concludes often leads to penalties, and here’s why:

1. Lender's Lost Interest: When you sign a mortgage agreement, your lender expects a certain amount of interest over the term. Breaking the mortgage early disrupts this expectation. The penalty compensates the lender for the interest they won't be receiving as initially agreed.

2. Contractual Agreement: A mortgage is a legal contract. The terms include a commitment to maintain the loan for a specified period. Breaking the agreement early triggers a penalty, similar to other contractual scenarios.

3. Recouping Costs: Setting up a mortgage involves administrative and operational costs for the lender. If a mortgage is broken early, lenders use penalties to recoup some of these expenses.

4. Risk Management: Mortgages are priced based on risk. When you break a mortgage, the lender may need to lend that money out again at a lower interest rate, increasing their risk. Penalties help mitigate this.

Understanding these reasons helps borrowers recognize the importance of carefully considering the term length and their future plans when securing a mortgage. It's always wise to discuss potential penalties with your mortgage broker to avoid surprises down the road.

Contact The Mortgage Missus Inc. today to get the process started! 

Tonia Mercer | The Mortgage Missus Inc.

About the author,

Tonia Mercer is an independent mortgage broker. She has been in the industry for 15 years, in 2021 she launched her own brokerage The Mortgage Missus Inc. 

Tonia is passionate about financial education and believes that working with independent experts is the best way to get unbiased, professional advice. She has joined forces with local independent home and auto, financial advisor, legal, appraiser and real estate service providers.Effectively creating a concierge service for all things financial and real estate.

Tonia donates a portion of all mortgage revenue to Mercer's Mission, a street dog and cat feeding mission in the Dominican Republic. 

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