What is the Penalty for Breaking a Mortgage With TD?

Taking out a mortgage is a big financial commitment. While most homeowners are able to fulfill their mortgage obligations, sometimes unexpected life events occur that make keeping up with mortgage payments difficult or impossible.

If you have a mortgage with TD and are considering breaking it, either through selling your home or defaulting on payments, it’s important to understand the potential penalties you could face.

How Mortgage Penalties Are Calculated

Most mortgages issued by Canadian banks, including TD, contain a clause that allows the lender to charge a penalty if the mortgage is broken prematurely. With a closed mortgage, the penalty is calculated based on the interest rate differential – the difference between your current mortgage rate and the rate TD could get for a new mortgage of the same term today.

For example, if you took out a 5-year closed mortgage at 3% interest two years ago, but today’s 5-year rate is 5%, TD could charge you a penalty of 2% of the mortgage principal for the three years remaining on your term.

With an open mortgage, the penalty is usually equal to three months of interest. TD also charges administration fees on top of the interest penalty for both closed and open mortgages.

You can easily use our TD Mortgage Calculator now!

Factors That Influence the Mortgage Penalty

Several factors affect the size of the mortgage penalty with TD:

• Remaining amortization – The longer left on your mortgage term, the higher the penalty.
• Type of mortgage – Open mortgages have lower penalties than closed.
• Interest rates – If current interest rates are lower than your mortgage rate, the penalty will be smaller.
• Outstanding principal – The penalty is calculated as a percentage of your remaining mortgage balance.
• Province – Mortgage rules can vary from province to province.

So before breaking your TD mortgage, get an estimate of the specific penalty you will face based on your circumstances.

Avoiding Mortgage Penalties

Here are some tips to avoid mortgage penalties if possible:

• Wait until the end of your term – Most mortgages can be paid off or renegotiated without penalty after the term expires.
• Transfer to another property – If you sell your home, the mortgage can often be transferred to a new property purchase without penalty.
• Refinance with TD – You may be able to refinance with TD at a lower rate without penalty.
• See if TD offers penalty forgiveness – Ask them if they are willing to waive or reduce the penalty.
• Buyout the penalty – You can pay the penalty amount to avoid it being charged.

What Happens if You Can’t Pay the Penalty?

If you are unable to pay the mortgage penalty, TD may choose to:

• Add the penalty amount to your mortgage principal. This increases your debt.
• Sue you for the penalty amount. This can damage your credit score if they obtain a judgment.
• Send the account to collections, also hurting your credit.
• Foreclose on your home and force a sale to recover costs.

Obviously, it’s best to avoid this outcome if at all possible. Communicate with TD early if you expect to have trouble paying the penalty. They may be willing to work out alternative arrangements with you.

Breaking a mortgage with TD can be costly if done improperly. But being aware of penalties and taking steps to avoid them can save you significant money and stress. Reach out to their mortgage specialists who can help you navigate this process.

William Lyon