Here is the process my clients go through to determine if lowering their Mortgage is financially beneficial for them. Please read top to bottom – no skipping :-).
Prerequisite reading to understand any Mortgage change:
Switch/Transfer. A Mortgage switch/transfer can happen during the term of the Mortgage OR on the Mortgage renewal date.
Switch/transferring the Mortgage during the term will incur a Mortgage penalty. Switch/transferring the Mortgage on the renewal date will not incur a Mortgage penalty.
A switch/transfer of a Mortgage retains the same Mortgage balance, amortization and Mortgage default insurance premium (if applicable). What changes in a switch/transfer is the Mortgage product (rate, lender etc) and resetting of a new Mortgage term (1-5, 7, 10 years etc).
There is an opportunity, in most cases, to add up to $3,000 of Mortgage penalty into your new Mortgage. The cost of the legal fees, in most cases, are absorbed by the new Mortgage lender.
Refinance: A refinance is an option ONLY when the new Mortgage amount is equal to or less than 80% of the appraised value of the home.
A refinance can change ALL components of the Mortgage (term, rate, amortization, lender etc).
A refinance is useful to lower the Mortgage interest rate AND use home equity to consolidate other higher interest debt.
Refinancing the Mortgage during the term will incur a Mortgage penalty. Refinancing the Mortgage on the renewal date will not incur a Mortgage penalty.
The additional cost of a refinance is the home appraisal, and Real Estate lawyer fees (there is a new Mortgage being registered on title of the property).
The “should I make a Mortgage change” steps:
- Revisit medium-long term Real Estate plans. Having some sort of rough plan or vision to work towards will help guide the answers to other questions I’ll have for you as we enter this process.
Side Note: if there has been a major change to your financial position since purchasing your home (employment or credit profile), perhaps starting their is best? - Understanding your Mortgage payout penalty. Remember, your Mortgage is a contract and there is a cost to breaking the contract.
Side Note: There is a large group of Mortgage holders in Canada with restricted Mortgages. Many, many people chase interest rate when arranging their Mortgage financing. And here we are. Those people, who got ultra low rates (rates people would scoff at today) are stuck. They are locked in to restricted Mortgages without as much flexibility to take advantage of new opportunities. Rate is a big piece of the Mortgage puzzle. I get that. I don’t think interest rate is the only deciding factor. - Calculating the net effect of saving with a lower interest rate. There will be a cost to breaking your Mortgage. There will be a monthly savings in your Mortgage payment by lowering your interest rate.
Determining how long it would take to earn back the cost of your penalty is a key factor in deciding if a Mortgage change helps you save.
Eventually, your Mortgage will come up for renewal and you can access market interest rates at that time – with no penalty!
Side Note: if refinancing, looking at the overall finanical picture might be a better angle to view the “savings”. Example, adding high interest debt into the new Mortgage will add to the overall picture, including the Mortgage penalty etc. Get it? - Navigating the fuzz. My client conversations come down to this …if the savings are not overwhelmingly obvious it might be best to wait to accomplish the same basic maneuver (access lower market interest rates) at Mortgage renewal time.
The not so obvious conversation topic is knowing where interest rates will be at Mortgage renewal time. I publish my thoughts and provide forward guidance on the interest rate market (low for a while) but can’t “know” where rates will be 8, 12, 24 months from now. You get that #covid #vacine. So, we navigate the fuzz as best we can together. - New Mortgage. You’re bringing your Mortgage to a new lender. And just like when you purchased, the new lender will want to understand your ability to qualify for the Mortgage you already have (see “side note” under point number one).
The new lender will check your credit and review your income documents. If this is a problem, this is a problem. Let’s discuss as the Mortgage lending market has a broad spectrum for unique situations.
Conclusion:
There are likely 138 blog posts on my website over the last 69 months. NONE of them are this direct of a call to action to contact me to see if there is a way to save you money. Go back and check :-).
It’s time. It’s time to take a careful look at your Mortgage and see if there is an opportunity for you to save money.
If I can help you, great. If not, sleep well at night you know you at least tried to save yourself some money with this ultra low interest rate environment our officials have created for us.
Talk soon,
Chad Moore
