The Most Costly Mistakes When Breaking a Mortgage

Breaking a mortgage can be a financially sound operation when well executed, but errors in judgment or process can quickly turn this strategy into a financial fiasco. In Quebec, borrowers who proceed with a break without adequate preparation lose an average of $3,000 to $15,000 in avoidable costs, according to data from AMF-certified mortgage brokers. These losses result from incomplete calculations, inadequate comparisons, lack of awareness of contractual conditions, and insufficient negotiation. Here are the most frequent and costly mistakes to absolutely avoid in your mortgage-breaking process.

Mistake 1: Ignoring the Break-Even Calculation

The most fundamental and costly mistake is proceeding with a mortgage break without performing a rigorous break-even calculation. Many borrowers focus solely on the rate difference without quantifying all breakage costs or calculating the number of months needed to recover these costs. A borrower who pays $15,000 in penalty and fees to save $200 per month will need 75 months (over 6 years) to reach break-even — well beyond a 5-year term. Without this calculation, it is impossible to know whether the operation is truly profitable. Worse still, some borrowers discover after the fact that monthly savings are lower than estimated, pushing the break-even even further out.

Mistake 2: Comparing to Posted Rates

Mortgage rates posted by financial institutions are showcase rates rarely offered to borrowers. Comparing your current rate to the posted rate systematically overstates the gap and potential savings. Rates actually negotiated by a mortgage broker are typically 0.50% to 1.50% below posted rates. A borrower who believes they can save $350 per month by comparing their rate to the posted rate may only save $150 to $200 per month with the negotiated rate, which completely changes the profitability analysis and break-even calculation.

Mistake 3: Neglecting New Contract Conditions

Focusing exclusively on the rate while ignoring other contractual conditions is a mistake that can be costly in the long run. Some lenders offer slightly lower rates but with significantly more restrictive conditions: prepayment privileges limited to 10% (vs 20% with other lenders), IRD penalty calculated on the posted rate rather than the contractual rate, portability restrictions, or limited conversion clauses. A borrower who obtains a rate 0.10% lower but loses 10% in prepayment privileges forfeits the ability to repay up to $40,000 per year without penalty on a $400,000 loan. If your situation changes and you need to break the mortgage again, an IRD penalty calculated on the posted rate could cost $6,000 to $15,000 more than one based on the contractual rate.

Mistake 4: Forgetting the B-20 Stress Test

Some borrowers mistakenly assume they will automatically qualify for new financing since they already have a mortgage. In reality, refinancing with a new lender requires full qualification under OSFI's B-20 rules, including the stress test at the higher of 5.25% or the contractual rate plus 2%. If your financial situation has changed since the initial financing — increased debts, decreased income, transition to self-employment — you may not qualify. Discovering this problem after having initiated the process, obtained an appraisal, and incurred preliminary legal costs represents a waste of money and time. Your broker should verify your eligibility at the very first consultation.

Mistake 5: Not Negotiating and Not Using Incentives

Many borrowers accept the first rate offer without negotiating, potentially leaving thousands of dollars on the table. Lenders have negotiating margins on rates, and competition for refinancing clients is fierce. Moreover, transfer incentives are often available but rarely offered proactively: cash back of $500 to $3,000, coverage of legal fees up to $1,500, and sometimes even coverage of discharge fees. An experienced mortgage broker knows which lenders offer these incentives and how to maximize them. Not using a broker and negotiating directly with a single bank is one of the most costly mistakes, as you have no negotiating leverage without competing offers.

Mistake 6: Not Verifying the Discharge Statement

The final discharge statement issued by your outgoing lender indicates the total amount to be repaid, including the balance, penalty, accrued interest, and fees. Some borrowers sign at the notary's office without carefully checking this document, later discovering discrepancies with initial estimates. Interest accrued between the penalty calculation date and the actual repayment date, unexpected administrative fees, or calculation errors can increase the amount by several hundred to several thousand dollars. Request this statement at least 48 hours before the planned signing date and verify each line with your broker.

IRD penalty on posted vs contractual rate

Two distinct methods of calculating the interest rate differential used by Canadian lenders. The posted rate method (used by major banks) compares your contractual rate to the current posted rate minus the theoretical discount, producing a higher spread and penalty. The contractual rate method (used by monoline lenders and some cooperatives) compares your contractual rate to the current contractual rate for an equivalent term, producing a fairer spread and penalty. The difference can represent $5,000 to $15,000 on the same balance.