Experiencing rate envy?

What is a second chance? An opportunity to try something again, a fresh start, or a do over (or if you play golf consider it a mulligan). If you’re a homeowner, the current market conditions may be giving you that second chance right now. You have likely heard that mortgage interest rates have plummeted to very low levels never seen before. And unless you’re a mortgage professional; like most people you’re left wondering if there’s something you should be doing with your mortgage?

…Jane has a mortgage rate that is 1% higher than the current rates. Let’s say Jane has a $300,000 mortgage which comes due in a year from now (this is known as the maturity date or renewal date). If mortgage rates were to go back up from where they are now to her current rate at renewal, it means Jane will end up paying 1% higher than current rates for the following 5 years. Now compare that to if she took a new 5 year term today she would pay 1% lower on her mortgage for the next 5 years. So on Jane’s $300,000 mortgage that 1% difference would equate to savings of over $15,000 in the 5 year term. 

Now being that we’ve never seen rates this low before, it seems highly unlikely we’ll see them stay this low for an extended period of time. This means the opportunity to save on interest and buy yourself time is limited especially considering the Bank of Canada recently announced they’re cancelling the Canada Mortgage Bond Purchase Program. Combine this with the fact that many of the mortgage deferral programs which were launched in March 2020 as a relief effort amidst a rapidly evolving health and financial crisis are coming to an end, not to mention the political landscape south of the border, could signal the bottom of where fixed rates will be.

One thing we do know for sure is that when fixed rates do start to climb, we’re not given ample warnings the same way we do when the Bank of Canada signals for a Prime Rate Change. Unfortunately not all mortgages are created equal, meaning not everyone can or should take advantage of current rates. Some of the most important factors to consider when deciding if you can or should redo your mortgage are:

1. 1. Are you fixed or variable? If you’re in a variable rate mortgage, you might be able to lock in with your current lender without penalty at all. Keep in mind, you don’t get to lock in at your current variable rate as it will be whatever the fixed rates are that you can lock into. You’ll want to find out from your lender what rate they will offer you to lock in and compare that to what other lenders can offer. In some instances, it makes sense to move lenders even with paying a penalty if the rate and/or product your current lender is offering isn’t as favourable as others are. Just remember that not all mortgages are created equally so don’t just compare rates as there’s fine print to consider as well.
   2. When is your mortgage due? If you only have a few months remaining on your mortgage, you might be able to renew early with your current lender without penalty. Some banks and mortgage lenders will renew without penalty within 6 months where others are typically 3-4 months before your mortgage expiry date. If your lender won’t let you renew your mortgage early without penalty, then you’ll want to weigh out the pros and cons of securing a new mortgage vs waiting it out.
   3. Will your lender let you out of your mortgage early? This is a big one. Some products have a clause that only lets you break your mortgage early by selling your home. The reason people would have chosen this product initially is to have taken advantage of a deeper discount on the mortgage offered at that time in exchange for certainty to the lender you would stay with them for the length of the term. If you happen to have this product, you might find yourself frustrated that you can’t get out of it, but you also need to consider the savings you’ve been able to enjoy up to this point by having this product in the first place when comparing to what was available at the time you chose your mortgage. Hindsight is 50/50.
   4. How much is your penalty? This is often the biggest hurdle most homeowners need to consider when exploring new options. If the penalty being charged by your existing lender is too high, there is a good chance you won’t be able to redo your mortgage early unless you’re prepared to pay out of pocket to cover some of the penalty costs. Lenders use different formulas for penalties so it’s important to get that information from your lender to make an informed decision. Having said that, there are lenders currently offering significant amounts of cash back to cover things like penalties, payout debts, and home renovations among others. These are newer products to the market that have created unique opportunities which up until recently weren’t available. In many cases at the moment, the savings is higher than the penalty but even in the scenarios where the savings isn’t higher than the penalty based on what you have remaining on your current term, the long term peace of mind could still be worth redoing your mortgage early.

There are other factors that should be considered like if you plan on selling in the next few years, or if you’re able to qualify. But what we’re seeing at the moment is record low interest rates which makes it a really good time to at least review your mortgage and ensure there is a proper strategy in place for the foreseeable future. If you’re like most people and are wondering if there’s an opportunity to save money, here’s what you need to do:

• First, obtain a current information statement from your lender confirming the mortgage balance, the maturity date, and penalty amount.
• Next call, text or email our team at Benchmark Mortgages and provide the information you received from your mortgage lender.
• One of our Brokers will crunch the numbers to find out what options are available to you so you can make an informed decision and see if it makes sense in your situation to redo your mortgage early.