I have received numerous calls from clients wondering if it is worth it to break their current mortgages and remake them at the current lower rates.
The straightforward answer is that it all depends. That depends on:
- Where you are in the current term of your mortgage (how long you have until your maturity date)
- What is your current interest rate
- Which lender you are with
- Whether you are fixed or variable rate
Most lenders have prepayment penalty calculators online. It is quite simple to calculate what your penalty might be.
If your mortgage is with a chartered bank, you will need to know the “discount” they gave you on their posted rate when you originally signed your mortgage.
Often times this discount is around 2% and you should be able to see it on one of your annual mortgage statements.
Incidentally, this reduction is one of the reasons I like working with monoline lenders. Monoline lenders are companies that only do mortgages. They calculate their prepayment penalties by comparing your rate to the best rate currently available.
It’s a small piece of the puzzle for choosing the right lender, but what it means is (usually) a prepayment penalty that’s considerably smaller. If you are considering mortgage options, this is an important point to understand.
So let’s come back to the question of whether the time has come to remake your mortgage.
If you calculate your penalty and it seems reasonable, the next step is to compare the penalty amount to the difference in interest charges between your current mortgage and what the cost would be if you renewed your mortgage.
If there are any cost savings, it might be a good idea to remake your mortgage now.
If there aren’t a lot of savings, but you want the security of a low rate for another five years, you might want to remake your mortgage.
I’ve been doing these calculations daily lately. I don’t like to see people paying the penalty (which usually equates to interest for the remainder of their current term) unless there is a significant interest saving.
Other factors come into play.
Some people want to integrate existing consumer debt with their mortgage and are less concerned about the penalty.
Some people have variable rate mortgages, so their prepayment penalty would only be three months of interest.
If you are wondering what the numbers look like for you, we are happy to analyze them for you.
Remaking your mortgage is either an early renewal or a refinance, depending on whether or not you choose to add extra money to your mortgage. Before making a decision anyway, it’s important to do your homework and understand the process.
For a quick rundown of what to think about, check out our Mortgage Renewal Duties blog.
Lenders are very competitive right now, and I have seen promotional rates and great packages.
One of the cool packages I’ve seen is a “no interest for three”. The lender covers the interest for the first three months of your mortgage to help free up cash flow during these uncertain times.
Here is an example of how it works. With a mortgage of $ 325,000 at a fixed rate of 2.24% over five years and amortization over 25 years, the regular payments would be: $ 1,415.82.
For the first 90 days of the new mortgage, the lender will cover the interest and you will save the difference.
Share of interest paid by the lender:
- First month: $ 606.67
- Second month: $ 605.16
- Third month: $ 603.64
Total savings for you: $ 1,815.47 – For reference only, based on monthly payments. Rates are subject to change at any time without notice.
You keep these savings in your pocket to provide some relief during these times or use them to improve your financial situation later. For example, you could:
- Use savings to manage other less flexible debts
- Use it for other purchases instead of using credit
- Apply the savings as a lump sum payment to your mortgage after the three months are up, save additional interest charges and reduce your amortization by an additional two months.
The mortgage is priced 0.05% higher than its regular product, but calculating the numbers shows that with the three months of interest covered, you save quite a bit compared to the lower rate.
For first-time homebuyers, this could be a great option. Moving into a new home comes with unexpected expenses.
Remaking your mortgage at a lower rate can mean cost savings and lower monthly payments. We’re happy to help you compare the numbers to see if it’s the right decision for you.
Take advantage of BC Day!