Would now a good time to break your mortgage and refinance?
This is a really common concern– when should I break my existing mortgage and refinance for a current best mortgage rate? It’s best to initially weigh out the costs.
Breaking your Mortgage
A Canadian mortgage rate agreement is a fully committed contract. There is an out clause, however it comes at a cost.
How Much is my Mortgage Penalty?
Typically the cost is determined based upon either three months worth of interest payments, or the interest rate differential (IRD).
Step 1: Calculate your IRD (Interest Rate Differential)
1) Use the principal balance and multiply it by the difference between your existing mortgage rate, and the new low mortgage rate.
2) Divide that number by 12.
3) Multiply that number by the remaining months in your term to obtain the approximate IRD owed.
Step 2: Calculate 3 Months of Interest
Just simply multiply the amount of interest you would owe on the present mortgage amount. Multiple this by 3.
Step 3: Find out the Penalty you Would Pay
When it comes to a fixed rate you would pay the greater of the IRD, or 3 months of interest. While in a variable rate, you would generally pay 3 months of interest. Contact your mortgage broker or lender to identify your specific required payments.
Step 4: Calculate Your Savings
1) Calculate the interest on your current mortgage rate.
2) Calculate the interest for your new mortgage rate.
3) Calculate your savings.
Step 5: Find out if it is Worth It
Decide if changing is worth it by comparing your expenses to your savings.
Open or Closed? Do you know which option is right for you?
Closed mortgages provide lower interest rates than open mortgages. Nonetheless, open mortgages include a smaller amount of fees.
What is a Closed Mortgage?
Closed mortgages cannot be prepaid, renegotiated or refinanced prior to maturation without paying a penalty. The majority of closed mortgages do provide a little flexibility by allowing you to pay back the principle through lump sum payments, or by enhancing your monthly payment amount for your best mortgage rate.
When to Consider a Closed Mortgage
Given that closed mortgages have considerably lower interest rates, they are more appealing to the average homebuyer.
When NOT to Consider a Closed Mortgage
If you believe that you will need to break your mortgage early.
What is an Open Mortgage?
Open low mortgage rate terms vary from 6 months to 1 year for fixed rates, and 3 to 5 years for variable rates. They may be settled prior to maturation without penalty.
When to Consider an Open Mortgage
If you are anticipating to get a large amount of money, an open mortgage will offer you the flexibility to settle your loan sooner.
The Beauty of Prepayments with Closed Mortgages
The majority of closed mortgages allow prepayment options, consisting of: lump sum payments as much as a portion of your annual principal, or enhancing your regular monthly Canadian mortgage rate payment.
How Much Does a Closed Mortgage Penalty Cost?
If you do choose to break your closed mortgage prior to completion of your term, you could possibly pay a penalty. The penalty you pay is the higher of either:
- 3 months of interest
- Or the Interest Rate Differential (IRD): the difference between today’s interest rate and the rate you currently pay
We’ve all heard the saying, “It’s the small things that matter most,” but what you might not know is this is also true when it comes to building equity into your home. Whether you’re thinking about selling now or later, it’s never too early to start investing in your home’s potential. Read more
The first round of changes to Canada’s mortgage rules were more bark than bite, according to a letter sent to the nation’s banks on Wednesday from the Office of the Superintendent of Financial Institutions. Earlier this year, mortgage experts speculated that new mortgage rules could have a dampening effect on hot real estate markets, as more and more mortgage applications would inevitably be rejected.
Draft guidelines released in March suggested that the OSFI would eliminate 100% financing using a 5 percent cashback mortgage as well as enforce stiffer regulations concerning loan-to-value ration calculations and stated income mortgages. The document also inferred that borrowers would be required to re-qualify each time their mortgage came up for renewal.
However, Wednesday’s announcement tells an entirely different story.