A great and timely article that is on alot of peoples minds about whether they should break their mortgage or not. A 10 year rate I have available at 3.89, its a no brainer. It was only 3.5 years ago our best fixed rates were over 5%. So chances are rates in 5 years when you come up for renewal will definately be higher than they are today at 3.29 and below dependant on lender. Let me be frank -I, unlike most banks, use a strategic program with my clients which educates them on how to prepare for rising interest rates, (by notifying youfor one) and saving you thousands of dollars on your mortgage.. How would you feel if in 5 to 10 years time your mortgage balance decreased by 10-25k and your amortization has reduced by 10-15 years…You would be saying ok I NEED THIS PLAN! Consumers NEED to start paying attention to things outside of just rate. This is our largest debt we will carry in our lifetime, but yet most consumers take advantage of the “do nothing plan” with their mortgage. By implementing small manageable steps in your mortgage makes a big impact long term. Looking for a fresh new approach, give me a call i’d love to hear from you 1-888-819-6536. You can utilize my services any where in canada! By phone, email, fax – in person.
Another tip-Remember you need to either have cash to pay for the penalty or built up some equity in your home so we can refinance the penalty into the new mortgage. I will show you a way that it does make sense but you have to be open to follow a simple but powerful program I put in place for my clients. Take a read below, and if you have any questions please feel free to call me for a free consultation at 1-888-819-6536.
Fixed-rate mortgages are at historic lows but if you are locked in to a contract with your bank, those benefits may be yet elusive.
First you have to do the math to see if breaking your contract is worth the penalties you may face.
“There is no grey area,” says Cindy David, a certified financial planner at Dupuis Langen Financial Management Ltd. in Vancouver. “It’s either worth it or it’s not.”
The big five banks are offering four and five year mortgages at just 2.99%.
“We’re even seeing 10-year fixed rate mortgages at 3.99%,” says Ms. David. “Think about that: Interest and principal at 3.99% for 10 years. From a financial planning perspective if any client approached me and said ‘Should I look into breaking my mortgage?’ My answer would be yes.”
Step one comes down to meeting with your financial institution and doing the math to determine whether or not the cost of breaking your mortgage is worth the anticipated savings from the lower rates. The fact is the penalty for breaking a mortgage can be thousands of dollars and in many cases, the cost and the future savings cancel each other out, in which case you may be wise to wait until your mortgage is up for renewal.
When you cancel or break a mortgage you will be charged the greater of three months’ interest or the Interest Rate Differential better known as IRD in mortgage land. “IRD is an arbitrary number based on a formula the lender has predetermined to ensure the lender breaks even,” says. Ms. David. “Not all lenders use the exact same formula so you have to go to your financial institution directly to understand what the Interest Rate Differential is and what your penalty will be.”
Invis mortgage brokerage in Vancouver provides an actual calculation they conducted for a client. The client was mid term in a fixed-rate mortgage with a current balance of $286,691 at 4.49% due to mature on March 1, 2014. In this case, the IRD applied and the penalty came to $11,505 plus the legal and appraisal fees to obtain a replacement mortgage of about $1,200. The interest to be saved by getting a new mortgage at 3% was just $8,982. In this case, it did not make sense to break the mortgage.
One way to decrease the penalty is to make the most of your prepayment privileges before ordering your payout statement, says Laura Parsons, mortgage expert, BMO Bank of Montreal in Calgary. “For example, our maximum prepayment is 20% of the original mortgage — not the current balance. On a $60,000 mortgage that means you can prepay $12,000. Prepaying first and then calculating the penalty on the revised balance will lower the penalty.”
Another option: rather than doing an early renewal and paying the penalty, it may make sense renew early and blend and extend your mortgage. “That means the bank will take the going rate and your existing interest rate and blend them,” says Ms. Parsons.
“It’s a pro-rated happy medium rate.” Minus the penalty.
If it does make sense to break your mortgage in order to take advantage of the new low rates, both Ms. David and Ms. Parsons advise to maintain the repayment schedule you’ve already put in place. This will save you tens of thousands of dollars in interest costs over the life of the mortgage.
“These are in depth conversations you should have with a mortgage specialist,” says Ms. Parsons. “If the penalty is $20,000 what is the ROI on the lower rate? How long are you going to have the house? If you’re planning on moving in three years, don’t take a five-year mortgage or at least understand what’s going to happen at that time if you plan to break the mortgage. Make your decision based on a lot of factors. And if you’re looking for peace of mind, as many people are, ask your bank for historic trends on rates. Unfortunately, there is no crystal ball, but it may help give you a sense of what to expect.”