Author Topic: Canadians: considering refinancing 5 year term early - bad idea?  (Read 3537 times)

nereo

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To anyone with experience with Canadian mortgages and refinancing... (Canadian mortgages have some subtle differences from US mortgages)
(background)
I have a $170k remaining on a 25 year mortgage with a 5 year term, and I have exactly 18 months left on my term. 
I put 20% down so no PMI.
My current fixed rate term is 3.14%. 
Currently my bank is offering 2.74% for a fixed 5-year term. 
It would be fantastic if that was available 18 months from now, but... who knows.
(my dilemma)
I am considering refinancing now to lock in that loan.  However, the research I've done suggests there would be penalties to pay, even if i was sticking with the same lender (which I must given some peculiar laws specific to my building).  If i refinanced today I would save $1,200 in interest over that 18month period, which is barely worth it even without fees.  BUT - my main motivation would be to 'lock-in' a great rate for the next 5 years.  Call it 'fear of the unknown' but my worry is that in 18 months the terms will be >>4%.

I should add that even if rates go up I still have some arrows in my quiver - I have current investments that roughly equal the current mortgage, and I have that ability to roughly double our monthly mortgage payments to end it sooner.    But MAN it would be nice to have that rate for the next 5 years.
Anyone in a similar boat? Anyone gone through refinancing before the end of your term?

RidinTheAsama

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #1 on: May 12, 2015, 06:00:58 PM »
I'm in the process of refinancing right now.

I'm 1.5 years into a 5 year term.  I was in a Variable with P-0.4, and a P-0.8 became available.

I did the math and even after the penalties (assuming they would have been invested at 5% growth otherwise) I'll be saving >$2000 over the remainder of the 3.5 years.  I didn't even factor in the additional savings I expect to be had in the following 1.5 years since who knows where rates will be at by then.

It was easier for me to justify since it seems quite likely that rates will be higher in 3.5 years.  As for your 1.5 year decision it seems a bit tougher to decide....

I'd say do the math and if you're guaranteed a win within your remaining 1.5 years then go for it.  The rest is a bonus. If you are taking a hit or just breaking even in the 1.5 years I'd hold off...

danzabar

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #2 on: May 18, 2015, 05:47:01 PM »
I know that breaking a mortgage early is a very complicated process.
however, I would encourage you to look at a broker. That rate is high by today's standards.
I'm looking at closing with a 5 year 2.49 mortgage. Take a look at ratehub and possibly even truenorth mortgages, They aren't for everyone but they can find you an excellent mortgage rate if you have solid financials.
best of luck to you,

daverobev

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #3 on: May 18, 2015, 06:32:10 PM »
If you have 18 months left, see if you can refinance a year from now - Scotia lets you refi within 6 months of the end.

I read somewhere you can get 10 year mortgages for 3.8%. Our main mort isn't up til 2017, but I'm tempted to do a 10 year mort with 10 year amortization when it comes round.

Still, history says variable nearly always wins.

nereo

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #4 on: May 18, 2015, 06:43:13 PM »
thanks for the input guys... I think I"ll wait until I'm 6 months out (11 months from now) and then try to refinance early.  I spoke with my current lender briefly and it seems the fees would be well in excess of $3k if I did it now.  Hard to make that up unless rates jumped well over 4%.  Who knows - maybe the rates will hold at/near where they are for another year.  If they don't and they skyrocket we'll just aggressively pay it off and be done with it.

It's hilarious to hear that a 3.1% rate is "high" by today's standards.
Variable may nearly always win, but it's very rarely been this low before.  It's hard for me to fathom "beating" 2.49% 

cheers

daverobev

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #5 on: May 19, 2015, 01:24:05 PM »
thanks for the input guys... I think I"ll wait until I'm 6 months out (11 months from now) and then try to refinance early.  I spoke with my current lender briefly and it seems the fees would be well in excess of $3k if I did it now.  Hard to make that up unless rates jumped well over 4%.  Who knows - maybe the rates will hold at/near where they are for another year.  If they don't and they skyrocket we'll just aggressively pay it off and be done with it.

It's hilarious to hear that a 3.1% rate is "high" by today's standards.
Variable may nearly always win, but it's very rarely been this low before.  It's hard for me to fathom "beating" 2.49% 

cheers

Remember it's not "2.49% absolute", it's "2.49% over inflation".

If inflation is -2% and you're paying 2.49%, that's the same as inflation being 5% and you paying 9.49%.

TrMama

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #6 on: May 19, 2015, 01:39:25 PM »
I'm surprised your lender hasn't already contacted you about a re-fi extension. We've had three different mortgages over the past 10 years (3 different homes) and at some point during the mortgage the lender has always contacted us to refi to a lower rate and extend for another 5-7 years. There's never been a fee, because they get to lock us in as customers for another 5-7 years.

In your boat, I'd call them up to see if this offer is forthcoming. If it is, consider taking it. If not, finish up your term and then go variable. Since you have the cash on hand, if rates start to go up then you can either pay it off or lock it in before things get out of hand.

nereo

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #7 on: May 20, 2015, 05:29:59 AM »
Remember it's not "2.49% absolute", it's "2.49% over inflation".

If inflation is -2% and you're paying 2.49%, that's the same as inflation being 5% and you paying 9.49%.
I cannot make sense of your response.  First, the rate is based on the absolute value of what you owe - e.g. a 2.49% rate on $100k would generate $2,490/year.
Second, I don't understand why you suggested inflation going (or being at -2%).  That would be pretty catastrophic.
Third, if inflation went to 5% it would not be "the same" as paying 9.49% - I'd have a real-adjusted rate of -2.51% at that point.

Debt is an inflation hedge.  Inflation is one of the best things about having a mortgage.

inflation rates see: http://www.statcan.gc.ca/daily-quotidien/150417/dq150417a-eng.htm

nereo

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #8 on: May 20, 2015, 05:32:22 AM »
I'm surprised your lender hasn't already contacted you about a re-fi extension.
No, the lender hasn't contacted me, and doesn't seem interested in doing a refi unless I absorbed the fees.  Why would they?  Currently I am paying 3.1% for another 17 months... why would they want to lower it for another 5 years?  If I were them, I'd wait out the 17 months, gaining the little extra interest and then hope the client's next term was >2.49%

MorningCoffee

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #9 on: May 20, 2015, 06:13:23 AM »
Can you do a "blend and extend"? Not sure if any bank does that anymore, but we use to do that when rates were steadily going down. The lender would set a new rate somewhere between current locked-in rate and lower posted rate, and it would reset the date to another full 5 years. No breaking the mortgage, no penalty. It was free, quick and easy.

daverobev

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #10 on: May 20, 2015, 08:51:45 AM »
Remember it's not "2.49% absolute", it's "2.49% over inflation".

If inflation is -2% and you're paying 2.49%, that's the same as inflation being 5% and you paying 9.49%.
I cannot make sense of your response.  First, the rate is based on the absolute value of what you owe - e.g. a 2.49% rate on $100k would generate $2,490/year.
Second, I don't understand why you suggested inflation going (or being at -2%).  That would be pretty catastrophic.
Third, if inflation went to 5% it would not be "the same" as paying 9.49% - I'd have a real-adjusted rate of -2.51% at that point.

Debt is an inflation hedge.  Inflation is one of the best things about having a mortgage.

inflation rates see: http://www.statcan.gc.ca/daily-quotidien/150417/dq150417a-eng.htm

What? Numbers are numbers. I'm saying that your mortgage rate has to be compared to inflation to see if it's good or not.

If you're paying 2.49% on 100k yes it will cost you $2490, but if inflation is 2.49% it has "effectively" cost you nothing. I'm saying it's the difference between the rate and inflation that means anything, not the number on its own.

If inflation was 10% and my mortgage was 8% I'd be happier than if inflation was zero and my mortgage was 2%. Mathematically speaking.

nereo

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #11 on: May 20, 2015, 09:35:16 AM »
e - e.g. a 2.49% rate on $100k would generate
What? Numbers are numbers. I'm saying that your mortgage rate has to be compared to inflation to see if it's good or not.

If you're paying 2.49% on 100k yes it will cost you $2490, but if inflation is 2.49% it has "effectively" cost you nothing. I'm saying it's the difference between the rate and inflation that means anything, not the number on its own.

If inflation was 10% and my mortgage was 8% I'd be happier than if inflation was zero and my mortgage was 2%. Mathematically speaking.
Ok - I'm not arguing that inflation has an effect on the amount you pay.  Obviously it does.  And re-reading (and then re-reading again) your post I kinda understand the math you are using (although I still disagree that a 2.49% mortgage at -2% inflation would be effectively the same as a 9.49% interest rate with 5% inflation... in part because with the former the economy is imploding and with the latter I'd likely choose paying off the loan entirely).  Also, I believe what you meant to say is "...it's 2.49% minus inflation"

My objection is that it makes no difference whatsoever for my situation.  I cannot control inflation rates, and I can only use historical trends to predict what they might be.  Furthermore, a 2.49% interest rate is better than a 3.1% rate.  Always.  And the future inflation rate won't change based on my mortgage rate. The only true variable here is my interest rate.

RidinTheAsama

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #12 on: May 20, 2015, 10:02:32 AM »
I spoke with my current lender briefly and it seems the fees would be well in excess of $3k if I did it now. 

a $3000 penalty on a $170k mortgage at 3.14% is really high.  Are you sure about that?

Typically for most Canadian lenders the penalty is 3 months worth of interest. 
In your case $170,000 x 3.14% x 3/12 = $1335. 
I'm sure each lender calculates it a little differently and most have an additional $75 to $300 "transfer fee" they tack onto the end.  But that's still a very different number...

You might want to confirm the penalty with another representative from your lender before doing your final math on this.

nereo

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #13 on: May 20, 2015, 10:09:31 AM »
I spoke with my current lender briefly and it seems the fees would be well in excess of $3k if I did it now. 

a $3000 penalty on a $170k mortgage at 3.14% is really high.  Are you sure about that?
Hmm... I thought I had that right but I can double-check.  There is a language barrier that can cause misunderstandings (ah, Quebec...)
I will re-confirm this week and edit my post if necessary.

TrMama

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #14 on: May 20, 2015, 11:07:17 AM »
Can you do a "blend and extend"? Not sure if any bank does that anymore, but we use to do that when rates were steadily going down. The lender would set a new rate somewhere between current locked-in rate and lower posted rate, and it would reset the date to another full 5 years. No breaking the mortgage, no penalty. It was free, quick and easy.

Oops, that's what we've always done in the past. Blend and extend. DH is the mortgage expert in our house. The reason mortgage companies do this is because it's easier to keep an existing customer than it is to find new customers every time a term expires. Plus, if they give you the runaround you're likely to ditch them out of spite regardless of what rate they offer.

However, I also missed the fact that you're in Quebec. Many businesses in QC just don't do customer service. It's more of a "you get what you get and you don't get upset" model. If possible, try to find a decent English speaking mortgage broker. He or she can shop for rates for you and their fee is paid by your new lender.

RetiredAt63

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Re: Canadians: considering refinancing 5 year term early - bad idea?
« Reply #15 on: May 28, 2015, 08:21:32 AM »
I have always found my local branch people were more on top of things than the head office - but if you are having language issues locally, why not call the head office? Or do an online message if you use online banking.  You can usually find someone whose English is fine, my pension is managed by CARRA and I have been fine.

Ah, La Belle Province, la vie est different.

Hmm... I thought I had that right but I can double-check.  There is a language barrier that can cause misunderstandings (ah, Quebec...)
I will re-confirm this week and edit my post if necessary.