When considering a mortgage, be aware of potential costs that may arise, such as discharge fees and penalties for breaking your mortgage contract early. Consider these fees when negotiating your mortgage.
Mortgage Discharge
A mortgage discharge fee is a cost paid to release the lender’s claim on your property once your mortgage is fully paid. This legal document, known as the Discharge of Mortgage, frees you from any remaining mortgage obligations. The process and fees vary by province. In Ontario, for example, a notary must witness the document, and the discharge must be registered with the local Registry of Deeds, which may incur additional fees. Your lender will typically provide a letter confirming full payment and charge a discharge fee, the amount of which varies by lender.
Mortgage Penalty
If you break your mortgage contract early, such as by selling your home or switching lenders, you may face a penalty. The fee compensates the lender for lost interest. Variable-rate mortgages usually have a penalty of three months’ interest, while fixed-rate mortgages may incur the greater of three months’ interest or the interest rate differential (IRD).
Tips to Reduce Penalty Charges
Make sure the mortgage you choose gives you the option of making prepayments or anniversary payments. Many mortgages allow borrowers to pay up to 15-20% of their mortgage, but only once per year. If you inherit money, for example, you should consider this option. These prepayments are applied to your principal, and therefore reduce your interest costs.
Special Situations
Refinancing and Bankruptcy
A mortgage discharge is also necessary when refinancing or during bankruptcy. When refinancing, the existing mortgage is paid off, the lien is released, and a new lender places a lien on the property. In bankruptcy cases, the mortgage discharge relieves payment obligations but may require surrendering the property, which is then processed through foreclosure to remove your name from the title.
Collateral Mortgages and Discharge Fees
With collateral mortgages, additional fees and legal services may be required for a discharge, especially if you change lenders. Collateral mortgages often register an amount higher than the loan itself, which can limit your ability to borrow additional funds and may increase discharge costs if you switch lenders. Some lenders cover transfer fees for conventional mortgages and collateral mortgages.
Key Takeaways
Understanding the terms of mortgage discharge, penalties, and fees—especially for refinancing, bankruptcy, and collateral mortgages—can help you avoid unnecessary costs and navigate your mortgage options with confidence.
