Author Topic: Canadians--is it worth re-financing my mortgage?  (Read 2409 times)

backyardfeast

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Canadians--is it worth re-financing my mortgage?
« on: March 19, 2015, 01:36:54 PM »
So, I'm trying to do a back-of-the-envelope calculation of whether it makes sense to break my fixed-rate mortgage and convert to a lower, variable rate.  On the surface, it looks like a no-brainer, but I'm having trouble with the details, thanks to my fuzzy-math brain. Can someone help?

Currently, we have 2 separate mortgages for the total full value of our home.  Remaining balances are roughly

$218K @ 3.421%
$  88K @ 3.276%   Both have 3 years remaining on 5 year terms.

Our bi-weekly payment is $498 on the first one, with $284 in interest; on the second its $200, including $113 in interest.

Our bank has a currently posted 5-yr variable rate mortgage at 2.25%.  I assume that we would consolidate both mortgages into one (approx $316K) with that rate.  We wouldn't make the change until we have decided to not sell/move in the next 5 years, and I'm not worried about the risk of the variable rate.

I asked the bank what the discharge penalties would be, and he came back with the surprisingly-low-to-me amount of about $2650.

Is this indeed a no-brainer, or am I missing something?  I can do the math that at my current rate, I will be paying about $10,350/yr in interest, but I can't figure out how much I might save at the lower rate to see if it's worth the penalty.

Our main goal in doing this would be to be able to pay the mortgage down more quickly.  We would keep our payments at about $755/bw, which already includes a $50 extra payment.  With the lower interest rate, it looks like we could up this to about $120 extra per payment with no change to our budget.  So that looks like a major win...

Thanks for the help!

dycker1978

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #1 on: March 19, 2015, 02:47:50 PM »
Just ran a calculator I found online.  Payment would be about 635 bi weekly on a 25 year amortization.  1st year interest is aprox $6971.  The extra payment knock it to about 20 years...

I would probably do this, but make sure you have the discharge correct, and not just for the 88k loan.  That is what it sounds like too me.

SK Joyous

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #2 on: March 19, 2015, 02:57:16 PM »
I second double-checking the discharge (it sounds low)

On the calculator, it looks like this (I standardized to a 25-year mortgage and monthly payments, just to compare apples to apples)

Situation now:
88,000 = $430/month, for year 1 $2312 in principle and $2848 in interest
218,000 = $1082/month, for year 1 $5615 in principle and $7370 in interest
Total Year 1 payments: $10,218 in interest and $7927 in principle

Proposed situation:
306,000 = $1334/month, for year 1 $9224 in principle and $6790 in interest

Interest savings in year 1 = $3428

Therefore: worth it

Caveat: you didn't say how many years you had left, so you might need to run the calculations based on your actual situation
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Here's a handy online mortgage calculator I use to play with my mortgage prepayments etc:
http://www.decisionaide.com/mpcalculators/extrapaymentscalculator/ExtraPayments1.asp

backyardfeast

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #3 on: March 19, 2015, 03:59:11 PM »
Thanks so much to you both; especially for that clear breakdown, SKJoyous.  I will definitely double-check the penalties.  They seemed low to me, too, and now I'm wondering if the fellow on the phone got mixed up about what I was asking.  I also asked about blend-and-extend options, and I wonder if he gave me the penalties for that instead of for a full discharge.  I tried to be clear that I was looking at all scenarios, and even asked, "if we wanted to discharge and switch to the variable rate, are there any other fees or penalties that would apply?"  His response was only the discharge fee of about $75 (which I included in the $2650).  But maybe he got mixed up.

I will definitely go talk to someone in person if we decide to proceed.  If the fees are correct, it definitely looks worth it (and it would make me happier, as I expect rates to continue to stay low or even go down again over the next years).

Thanks especially for the clear way to use the calculators to check, too, SKJoyous.  I really don't have a math brain, and I can't see obvious things, sometimes!

Kashmani

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #4 on: March 19, 2015, 04:05:25 PM »
Canadian fixed-rate mortgages usually have two penalties:

1) Three months interest on the outstanding principal; and
2) The interest rate differential, i.e., the difference between what you are paying and what a new person taking out a loan would be paying, from the time of discharge until the end of your term.

Some lenders only apply the interest rate differential for part of the term. E.g., I used to have a mortgage that applied the interest rate differential in years 1-3, but not years 4-5.

Check the terms and conditions of your loan. Obviously, if you have to pay the interest rate differential, there is no benefit to be realized from switching to a variable-rate mortgage at this time. If your only penalty is three months interest, then do a simple calculation as to whether for the duration of your original term (not the term of the new mortgage), you will save more than the penalty. If so, then refinance.


backyardfeast

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #5 on: March 19, 2015, 04:26:02 PM »
Kashmani, thank you.  The rep told me about both of those, and explained how complicated the IRD was to calculate.  When he started the calculation, he said, "this is going to take a while, I better call you back."  Calculating 3 months interest on the outstanding principal doesn't sound that complicated!  But when I look at those numbers now, that looks like what they likely represent.  He quoted me $1838 penalty for the $217K mortgage, for instance.  3 months (6 payments) of the interest charge of $284.11 = $1704.66.  Pretty close.

It is possible that the IRD is only being applied for part of the term.  I'll definitely talk to someone else at the bank and be super-clear about what I'm comparing.

The Fake Cheap

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #6 on: March 19, 2015, 08:15:20 PM »
So I'm going to throw this out there....Are you sure you want to go variable?  The interest rates are as low as they are going to get.  I've seen 2.79% fixed for 5 years.   That is not much of a spread from the variable rate.  Are you thinking the interest rates are going to remain at all time lows for another few years?  Just curious on your thoughts. 

backyardfeast

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Re: Canadians--is it worth re-financing my mortgage?
« Reply #7 on: March 19, 2015, 09:58:01 PM »
Fake Cheap, I'm kind of a peak oil doomer. ;)  So I actually do think the economy and interest rates are going to stay low for the forseeable future.  I think the low oil prices globally are from a global economic contraction in response to increasingly scarce and expensive resources.  I think we're in a bit of a vicious cycle, where global economies slowed down from high oil prices, which slowed demand, which depressed oil prices.  But now that prices are low, and are--for Canada and the US, anyway--below the costs of production, businesses are going to start also contracting (which we're already seeing in Alberta pretty dramatically, and I don't know about you, but I know a lot of BC trades people who have been working in AB for the last years who are going to be coming home looking for work that isn't there), causing layoffs, and decreased consumer spending.  I expect this to slowly contract our economy this year, and I don't think that the US economy is going to be able to keep going crazy as more and more shale gas companies start laying off and going out of business, with ripple effects through to the stock market.

I don't know if this will all happen quickly or slowly, but I do think the recent BOC rate cut has the potential to be duplicated.  I don't know how low mortgage rates themselves will go, but I'd rather be tied to the prime rate at this point.

I should add that part of all this is my experience over the last 7 or so years; we've been hearing forever that rates are going to start going up at any moment, and it just hasn't materialized.  The reason we have 2 mortages is that we started with a variable rate on a condo that at one point went down to 1.75%!  We wanted to hold onto it, so when we sold and bought our house, we just added a new one, as that rate was no longer available, lol.  Anyway, we started with variable rates here again, and then when rates DID rise a little, we bought the hype that this was it, and rolled into a fixed at 3.65%.  Guess what? That was the peak, and rates have only gone down, and now I'm stuck! ;)  We did a "blend and extend" to bring the rates down a little, but that just stuck us with a fresh 5 year slate.  So now I'd just love to have the flexbility back, and probably ride out the volatility for a while.

Hah--that was the long version!  Thanks for the question.