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.
Do you understand the difference between your mortgage term and your amortization period?
A frequent source of confusion for potential homebuyers is the difference between a mortgage term and amortization period. A standard Canadian mortgage rate has a 5-year term with a 25-year amortization period.
The mortgage term is the length of time you commit to a low mortgage rate, lender, and associated best mortgage rate terms.
Mortgage Amortization Period
This is the length of time it will take you to repay your whole mortgage. Longer amortization periods lower your month-to-month payments, as you are paying your mortgage off over a greater number of years. But nevertheless, you will pay even more interest over the life of the mortgage.
Maximum Amortization Reduced to 30 years on March 18th, 2011
In January 2011, Minister Flaherty revealed that the maximum amortization duration on all CMHC insured houses would be lowered from 35 to 30 years.
Quite a few home buyers opt for a reduced amortization period leading to greater regular monthly payments if they have the means to do so, understanding that it encourages desirable saving habits and minimizes the overall interest payable.
Short vs. Long Term Amortization Periods
Prepayment privileges set out by your lender will determine whether you can reduce your amortization period, by either enhancing your regular month-to-month payments and/or putting lump sum payments towards the principal. Nevertheless, beyond these privileges, you will typically incur charges for making extra payments. According to the Canadian Association of Mortgage Professionals, 24 % of Canadians benefited from prepayment options in 2009.
Have you considered this popular alternative?
The biggest debt you are going to deal with as a property owner is your mortgage. With the right approvals, you are able to borrow against the equity of your house with a home equity loan.
What is a Home Equity Loan?
This style of loan is somewhat different to a home equity line of credit (HELOC), which is a line of revolving credit with a flexible interest rate. A home equity loan is a one-time lump-sum loan. Lenders are normally worry-free when contributing to your existing low mortgage rate since they are protected by the fact that your loan is secured against your house.
A Tool for Debt Consolidation
The main benefit of a home equity loan is in its debt consolidation abilities.
How do I get a Home Equity Loan?
The best way of obtaining a home equity loan is through a Canadian mortgage rate professional.
Benefits of a Home Equity Loan
Money in your hands to settle outstanding high interest debts.
By paying off outstanding debts you are going to enhance your credit score.
The home equity loan may be spread over the lifespan of your best mortgage rate, typically as much as 25 years.
Tax deductions are readily available.
Downsides of Home Equity Loans
You will be jeopardizing your home if you do not have the means to pay the loan back.
Once you borrow against your house you lose equity or ownership in the home.
Speak to a mortgage broker today to find out if this financial product is the right choice for you.
Blend your mortgage to improve your rate.
Quite a few people are wondering how to lower their current mortgage costs.
Generally, the mortgage penalties you incur to break your mortgage are set up as the greater of three months interest or the value of your Interest Rate Differential. If you’re going to break your mortgage, try and do it when your mortgage is sitting in the “sweet spot”– this is when your rate is not high enough to trigger IRD and thus you’re only required to pay the three months interest penalty.
Unfortunately, the sweet spot rarely comes at a convenient time. Also, most people will have trouble ever fitting into this scenario if their rate is over 4 %. If this is your situation, speak with your low mortgage rate planner about a blended mortgage. There are two options that most banks will offer:
Blend and Extend or Blend to Term
Under a Blend and Extend option, the bank will give you a brand new term at the current rate but ‘blend’ in your penalty to your new rate.
The Blend to Term option is the same idea but your term remains as is. For example, you would end up with the same two years left but at a lower rate with the penalty blended in.
If you are in that “sweet spot” a good Canadian mortgage broker will show you calculations on just how much you can save by breaking your best mortgage rate. If you’re subject to an IRD, a good planner will go over what blended options are available to you and take into account your time frame and overall goal to help you select the option that’s the best fit.