Should you break your mortgage?
With the current low rates, homeowners are tempted to take advantage of the apparent savings and opt for a new mortgage with a better mortgage rate. However, many are finding out just how much a penalty can hurt their bank accounts and cancel out any savings they may have earned.
Before you break your mortgage, ask yourself these 5 important questions:
Do I fully understand the terms and conditions of my mortgage?
If not, you will need to re-read the terms to ensure you will not face major penalty fees. Many of us tell ourselves during the signing process that we won’t need to break our mortgage, but almost 10% of Canadians refinance before their term is up.
Can you transfer your current mortgage to a new home if you have to sell?
It’s so crucial to find out your options before it’s too late. Many lenders will also allow you to transfer penalty fees to your new mortgage, but that is equal to paying interest with interest.
Are you stuck with your lender forever?
Pay attention to the terms, for instance, you may not be able to break your mortgage unless you sell your home. Things get more and more complicated depending on the type of mortgage you have. Open mortgages come with higher rates as well as the flexibility to pay it off whenever you want. However, once you move into closed variable mortgages or have locked in your rate it gets a little more complicated. A closed rate mortgage penalty is typically three months interest. A lock in penalty usually requires the greater on three months interest or an IRD (interest rate differential).
What are the prepayment terms of your mortgage?
Figure this one out because if you fast track payments on your mortgage by paying a large lump sum, the less they can ding you with penalties.
How will your IRD be calculated?
This is essential. Depending on your lender they may use a qualifying rate or posted rate to calculate your penalty which will cost you may more than you anticipated. The interest rate differential was put in place to compensate the bank for the interest lost when your break your mortgage, so technically it is the difference between the rate on your contract and the current rate (as though the bank were re-lending the money). It could be calculated up to either the term of the mortgage or the amortization length which could be 25 years.
Still thinking about breaking your mortgage? Our team at River City Financial can help guide you through any difficult mortgage decisions you need to make. Call us today if you have questions or concerns. (587) 409-2944
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