Is It Time to Break Your Mortgage Contract?
Is It Time to Break Your Contract?
With mortgage rates still hovering at a 30 year historic low and the likelihood that mortgage rates will rise; chances are you have considered breaking your current mortgage term and processing an early renewal before rates rise substantially.
In some cases, the lenders are open to negotiations regarding your penalty if there is a short amount of time remaining on your term, usually one year and under. However the penalty can be quite substantial if you are not very far into your current mortgage term. Keep in mind that penalties vary from lender to lender and there are different penalties on the type of mortgages. If you opted for a “cash back” mortgage, there may be additional claw backs of these initial cash incentives.
People often assume the penalty for breaking a mortgage amounts to three months’ interest payments so, when they do a preliminary number crunch, it doesn’t seem so bad. However, in most cases the penalty is actually noted in the mortgage documents as the greater of three months’ interest or the interest rate differential (IRD). The IRD is the difference between the interest rate on your existing mortgage contract and today’s posted mortgage rate. With rates so low these days, the IRD tends to be greater than three months’ interest. For some people, breaking and renegotiating at a lower rate without careful planning can mean they come out no further ahead or even worse off.
While breaking a mortgage and paying penalties based on the IRD can result in a break-even proposition in the short term, if you look long term, you’ll see the true savings. The goal is to secure a long-term rate commitment before it is too late, and here lies the significant future savings. Some lenders will issue a pre approval rate commitment with a 120 day expiry date of which will delay the funding of the new mortgage, secure you current rates and may also reduce the penalty owing.
Here’s a basic example for review. You have one year left on your existing mortgage. Your lender is quoting you a $2500 penalty to break your current mortgage contract with the rate of 4.00%. The new mortgage rate is 3.00%, which means you will save $300 a month in payments, over the 5 year (60 month) term, You will have recouped your penalty payment in just over 8 months, leaving 52 months where you save $300 each month ($300.00 x 52) resulting in a whopping $15,600 in savings!
If you would like more information about how I, as a CENTUM Mortgage Professional, can assist you in ensuring that your best interests are looked after please do not hesitate to get in touch with me.
Posted by Chris Marriner
on October 17, 2011