Time for a better rate?

Mortgage interest rates have continued to drop during the last few weeks.

I’ve had many calls from clients wondering if it is worthwhile to break their current mortgages and re-do them into today’s lower rates.

The straight answer is it all depends. It depends on:

• Where you are in your current mortgage term (how much time is left until your maturity date)\
• What your current interest rate is
• Which lender you are with
• Whether you are in a fixed or variable rate

Most lenders have prepayment penalty calculators online. It is fairly straightforward 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 off their posted rate when you originally signed your mortgage.

Often that discount is around two per cent, and you should be able to see it on one of your annual mortgage statements.

Incidentally, this discount is one of the reasons that I love to work with monoline lenders. Monoline lenders are companies that just do mortgages. They calculate their prepayment penalties by comparing your rate to the best rate currently available.

This is a small piece of the puzzle for choosing the right lender, but what it means is (generally) a prepayment penalty that is considerably smaller. If you are considering mortgage options, this is an important piece to understand.

So back to whether now is the time to re-do your mortgage.

If you calculate your penalty and it seems reasonable, the next step is to compare how much the penalty is to the difference in interest cost between your current mortgage and what the cost would be if you re-did your mortgage.

If there is a cost savings, it might be wise to re-do your mortgage now.

If there isn’t much of a savings, but you want the security of a low rate for another five years, you may want to re-do you mortgage.

I run these calculations daily lately. I don’t like to see people pay the penalty (which usually equates to interest for the remainder of their current term) unless there is a significant interest savings.

Other factors do come in to play.

Some people want to roll existing consumer debt in with their mortgage and are less concerned about the penalty.

Some people are in variable rate mortgages so their prepayment penalty would only be three months’ interest.

If you are wondering how the numbers look for you, we are happy to crunch them for you.

Re-doing your mortgage is either an early renewal or a refinance, depending on whether you choose to add additional money to your mortgage or not. Before you make the decision either way, its important to do your homework and understand the process.

For a quick overview of what to think about, check out our blog Mortgage Renewal Homework.

Lenders are very competitive right now, and I’ve seen some interesting promo rates and packages.

One of the interesting packages I’ve seen is an “Interest Free 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’s an example of how it works. With a $325,000 mortgage at a 2.24% five-year fixed rate and 25-year amortization, 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 save the difference.

Interest portion paid by the lender:

• Month One: $606.67
• Month Two: $605.16
• Month Three: $603.64

Total savings for you: $1,815.47 — For illustration purposes only, based on monthly payments. Rates are subject to change at any time without notice.

You keep these cost 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 the savings to manage other debts that are less flexible
• Use it toward other purchases instead of using credit
• Apply the savings as a lump sum payment against your mortgage after the three months are up, save additional interest costs and reduce your amortization by an extra two months

The mortgage is priced .05 per cent higher than their regular product, but running the numbers shows that with the three months’ interest covered you actually save a bit as compared to the lower rate.

For first time home buyers starting out, this might be a great option. Moving into a new home comes with some unexpected expenses.

Re-doing your mortgage to a lower rate may mean cost savings and lower monthly payments. We’re happy to help you compare the numbers to see if this is the right decision for you.

Enjoy B.C. Day!

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.