Since fixed mortgage rates have been dropping like flies lately, many Canadians are beginning to wonder if they should abandon their current mortgage and refinance at a lower rate.  “How do I do this?  Is it worth it?   What is it going to cost me?  WHERE DO I BEGIN!?” … sounds stressful doesn’t it?  Let me help!

The Break-Up

First and foremost, you need to figure out what all of this is going to cost you.  It doesn’t take a genius to know that paying $10,000 in penalties to save only $5,500 in interest with a lower rate isn’t exactly worth it.  So, what is the penalty going to be to get out of your mortgage?  GENERALLY SPEAKING (check with your lender), it is the greater of 3 months interest or the Interest Rate Differential (IRD).  3 months interest is pretty self explanatory, but the IRD involves a little math.

An Example

Let’s say that you have a mortgage balance of $200,000, your mortgage rate is 5.29% (originally a 5 year fixed rate) but you’re not up for renewal for another 2 years and you’re looking at another 5 year fixed at 2.99%:

3 months interest = [(mortgage balance x annual interest rate)/12] x 3
= [($200,000 x 5.29%)/12] x 3
= ($10,580/12) x 3
= ($881.67) x 3
= ~$2,645

IRD = mortgage balance x months remaining in term x [(your rate – current rates)/12]
= $200,000 x 24 x [(5.29% - 2.99%)/12]
= $200,000 x 24 x (0.1675%)
= $9,200

In the above example, (I hope that you are sitting down) your penalty would be a whopping $9,200 .  Do you HATE MATH?  Let us do the estimate for you, check out our mortgage penalty calculator.

But What’s the Benefit?

The benefit and break-even point can be difficult for the average person to calculate, especially when you have so many options available to you.  You can pay the penalty out of pocket or finance the penalty by increasing your mortgage amount; you can keep your payments consistent (therefore paying your mortgage off FASTER with a lower rate) or maybe you’d like to better your cash flow situation and have a lower payment with the lower interest rate!  Having said all of that, you should really speak to a licensed agent to help you figure it out.  Let them do the math!

Other Costs to Consider

If you are staying with the same lender, these charges shouldn’t apply.  However, if you are thinking about jumping ship you may incur a discharge fee to leave (approximately $250), legal fees to re-assign the mortgage (approximately $495-$1,000) and/or an e-registration fee to the tax department (approximately $72.50).  Additionally, the lender may require an appraisal to be conducted on the property.  An appraisal can run anywhere from $100-$250 depending on the type of appraisal required (i.e. drive by or full).  Sometimes the appraisals are rebated by the lenders and sometimes they are extra.  Ensure that you take these costs into consideration as well before jumping into a new mortgage rate

RateSupermarket.ca Week in Review

Bears aren’t the only thing hibernating in the winter months.  Typically there isn’t too much activity in the real estate (and mortgage) market in the first months of the year either.  So, in an effort to win over some business and fill their sales pipelines, many lenders have been offering some incredibly low rates.

**This chart is based on changes over the last week to our Best Mortgage Rates Canada page. Mortgage Rates may vary depending on Province.

It comes to no surprise that nearly half (49.6%) of our visitors are searching for the best 5 year fixed closed rate (due to all of the hype from last Friday’s rate drop announcement by BMO).  However you may find it interesting that the other half (48.6%) of our visitors are searching for the best 5 year variable closed rate; although there hasn’t been any big changes in pricing for the 5 year variable rate it still remains one of the top mortgage searches!  The next most popular searches were the 3 and 4 year fixed products (each at 0.4%).

What’s in store for mortgage shoppers next week?  Stay tuned!

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