With the interest rate staying low and a monitored increase over the next couple of years, some home owners may be wandering if there is a cheaper interest rate available for them. The cost over a 25 year period can be quite significant and save you may years on your mortgage. Just 2 years ago, many were expecting the rates to go up and 2 years later it is still low. The Bank of Canada is expecting to see an increase by the end of the year but the economic turmoils around the world are making it challenging to drive the rates up. You can see the current trend from a historical perspective at CanEquity.
I have written a few post in the past about my personal experience with my mortgage and I continue to monitor the rates available as paying off my mortgage is one of my top goals to reach my Financial Freedom.
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1. Your Breaking Cost
The first step of evaluating your options to break your mortgage is to understand the penalty. The easiest way is to simply ask your bank to get the official number. For most financial institutions, it tends to be 3 months of interest penalty or what is called the Interest Rate Differential (IRD); whichever is greater. If you took a term a while back at a rate above 5%, the chances are that the penalty can be high. This is why I stay away from long term fixed rate, your options to make changes become very costly and you are stuck for a long time. For the official number, you’ll have to contact your lender.
2. Your Target Interest Rate
This step could be your first step or in conjunction with your first step as your target interest rate may be what triggered your desire to break your mortgage. The target interest rate is important as all your future calculation hinder on that to really assess your savings.
Nowadays, there are many mortgage brokers that can help you. Some have strong ties to banks and some are truly independent from any financial institutions. You’ll need to contact them to find out what offers they have. Don’t forget to ask about the details on the rates since often times, you won’t know which institutions it is with. Also make sure you understand the breaking penalties of the offers.
Since all banks offer mortgage rates online, you can easily do a pass to all their website or simply leverage the work some websites are already doing to pull that information together.
- Coast Capital Savings compares their rates with competitors
- CanadaMortgage.com compares over 20 financial institutions
3. The Added Cost Of The Penalty
Once you have the cost of breaking your mortgage, you need to assess how much that’s really going to cost you. In most cases, you are just going to lump that back on the loan. To get an accurate value of the cost, you need to use a mortgage calculator and your target interest rate.
Your decision to refinance can have the purpose of decreasing your monthly mortgage cost or to reduce your amortization. Reducing your amortization without increasing your payments saves you money.
4. Calculate The Savings
Since your are doing a business transaction (a very personal one), you need to assess the savings to justify the cost. I have always found it difficult to assess the true cost since the terms are usually shorter than the mortgage. The easiest way I found is by ensuring your remaining amortization is always lower.
See the list of mortgage calculators provided by the Office of Consumer Affairs. The banks will usually have a mortgage calculator that you can use in their mortgage center.
As you will find out if you read my previous posts on mortgage, I have never finished a mortgage terms. Like investing, I monitor the rates and my options. Managing your lending costs should be as important as managing your investment – it just requires a lot less time Early in your mortgage is the best time to take advantage of lower rates as it has a compounded impact.
Readers: Have you broken your mortgage terms before? What do you make of today’s rates?