Canadian Money Forum banner

1 - 20 of 45 Posts

·
Registered
Joined
·
215 Posts
Discussion Starter #1
If anyone is 1.5 - 2 years into a 5 year fixed rate mortgage you can save thousands of dollars by breaking your current mortgage and getting a new 3 year rate under 3%.

In the last week I have done this for 5 families saving them between $4,200 and $7,900 with no money out of there pocket. Conversely a couple of families have taken a lower payment instead ensuring that there end balance is the same. And yes, this is after penalties and legal fees.

Ideally you have some equity to cover the penalties and fees.

P.S. This is a public service announcement giving those in this community an opportunity to save some cash. Please don't think I am trolling for clients because right now I have lots. :) If you need me to do some math for you, let me know.
 

·
Banned
Joined
·
85 Posts
If anyone is 1.5 - 2 years into a 5 year fixed rate mortgage you can save thousands of dollars by breaking your current mortgage and getting a new 3 year rate under 3%.

In the last week I have done this for 5 families saving them between $4,200 and $7,900 with no money out of there pocket. Conversely a couple of families have taken a lower payment instead ensuring that there end balance is the same. And yes, this is after penalties and legal fees.

Ideally you have some equity to cover the penalties and fees.

P.S. This is a public service announcement giving those in this community an opportunity to save some cash. Please don't think I am trolling for clients because right now I have lots. :) If you need me to do some math for you, let me know.
Excellent post, Shayne.

I've broken mortgages before, and thank God I did. For example in 2007 rates were rising and I locked a few of my properties in. In 2008, with rates dropping, I broke the mortgages and have saved thousands upon thousands of dollars doing so.

For us frugal and careful investors, it's intrinsically tough for us to spend so much breaking a mortgage. However, think longer term...be proactive...


Again, great post Shayne!
 

·
Registered
Joined
·
3,936 Posts
Be VERY careful and consider ALL the costs when doing this. I broke a mortgage a couple of years ago and it cost me thousands in fees. I'm not going to itemize them for you, but suffice it to say they require investigation prior to any decision or action. Call your lender and ask them to tell you what ALL the costs will be if you do this. You may be in for a bit of an unpleasant surprise.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #4
Be VERY careful and consider ALL the costs when doing this. I broke a mortgage a couple of years ago and it cost me thousands in fees. I'm not going to itemize them for you, but suffice it to say they require investigation prior to any decision or action. Call your lender and ask them to tell you what ALL the costs will be if you do this. You may be in for a bit of an unpleasant surprise.
I agree, do your due diligence. Fees and penalties will always exist, but right now it is almost impossible not to come out ahead in the scenario I mentioned.
 

·
Banned
Joined
·
156 Posts
When do you find the IRD (Interest Rate differential) calculation kills the potential gains from the new rate? Around 2yr?

I tried my numbers using the RBC calculator and am down a couple grand if I do. However I'm at almost 3years in of a 5yr fixed at 5.4%.
 

·
Banned
Joined
·
85 Posts
When do you find the IRD (Interest Rate differential) calculation kills the potential gains from the new rate? Around 2yr?

I tried my numbers using the RBC calculator and am down a couple grand if I do. However I'm at almost 3years in of a 5yr fixed at 5.4%.
It's all a numbers game. It's too bad you didn't break a couple of years ago and went variable. Think of the money you would have saved.

Just find all your fees, punch in your numbers and go from there.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #7
When do you find the IRD (Interest Rate differential) calculation kills the potential gains from the new rate? Around 2yr?

I tried my numbers using the RBC calculator and am down a couple grand if I do. However I'm at almost 3years in of a 5yr fixed at 5.4%.
It depends really on your unique circumstances. I just did one exactly like yours and it worked out pretty much even. Client was able to get the last year at 2.9% and need some cash out anyhow, so it worked for them.

Fire me your numbers and I will see what I can come up with for you. I don't rely on any online calculators, I use my own....
 

·
Registered
Joined
·
3,061 Posts
I think the other consideration to throw into the pot is the extent to which you add extra payments each month or year to bring down your principal.

The mortgage lender doesn't want to lose the interest they were planning to make from you, so the penalty they assess typically amounts to the interest they would have made over the remainder of your mortgage at the current rate. But if you're routinely knocking down the principal with extra payments, you'll end up paying less interest over the remainder of your term -- in some cases way less, plus when it comes time to renew your mortgage you'll be renewing with a much lower remaining balance to pay off than if you'd just been making the scheduled payments. So even if the interest rate is higher at renewal, you might end up better off sticking with your existing mortgage and not breaking it.

As was noted above, everyone's situation is unique, I'm just pointing out that if you're making extra payments you should factor that into the equation as well.
 

·
Banned
Joined
·
2,508 Posts
Fire me your numbers and I will see what I can come up with for you. I don't rely on any online calculators, I use my own....
How do you figure the IRD, doesn't every bank uses a different method? Also, will new lenders cover the discharge and new legal fees?
 

·
Banned
Joined
·
2,508 Posts
I think the other consideration to throw into the pot is the extent to which you add extra payments each month or year to bring down your principal.

The mortgage lender doesn't want to lose the interest they were planning to make from you, so the penalty they assess typically amounts to the interest they would have made over the remainder of your mortgage at the current rate. But if you're routinely knocking down the principal with extra payments, you'll end up paying less interest over the remainder of your term -- in some cases way less, plus when it comes time to renew your mortgage you'll be renewing with a much lower remaining balance to pay off than if you'd just been making the scheduled payments. So even if the interest rate is higher at renewal, you might end up better off sticking with your existing mortgage and not breaking it.

As was noted above, everyone's situation is unique, I'm just pointing out that if you're making extra payments you should factor that into the equation as well.
This is interesting. I've always wondered if it was better to just pay down the mortgage or break it and use extra cash flow (put it on the debt through lower amortization) from the lower rate interest rate.
 

·
Registered
Joined
·
3,061 Posts
This is interesting. I've always wondered if it was better to just pay down the mortgage or break it and use extra cash flow (put it on the debt through lower amortization) from the lower rate interest rate.
I think it really depends on the situation and the size of your lump-sum or extra monthly payments. I can pay up to 25% of my original mortgage amount in extra payments each year without penalty, which means I could pay off the entire mortgage before my initial 5-year term is up. But that's in theory of course; in practice there's no way I can cough up that much every year.

Let's say there's $150K left on my mortgage and I have two years left before my term is up for renewal. And let's say that each year I typically pay $15,000 in extra payments toward lowering my principal. If I break my mortgage today, the bank will charge me what they would have made if I were just doing my regular monthly payments over the next two years. But in fact I will have knocked the principal down by an additional $30K over the next two years, reducing the remaining balance and the interest that's calculated on it, so I have to factor that into the equation.

If the new rate is so much lower that I end up ahead over the entire 5 years of the new mortgage, then sure I would break the mortgage. And if rates start climbing up dramatically in two years I'll regret not having broken the mortgage. But honestly nobody really knows where rates are going to be in two years; it's not much better than trying to predict the stock market. It's all a gamble.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #14
Shayne, are you a mortgage professional?

I'm only asking because I like what I read in your posts and would be interested in working with you on some of my properties that are coming due.
I am, but I am out west. It may be in your best interests to work with someone local.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #15 (Edited)
I think the other consideration to throw into the pot is the extent to which you add extra payments each month or year to bring down your principal.
You are correct, but you would have to more than double your monthly payments for this to work out in your favour.


The mortgage lender doesn't want to lose the interest they were planning to make from you, so the penalty they assess typically amounts to the interest they would have made over the remainder of your mortgage at the current rate.
Not correct. The lender will charge the IRD which is basically the difference between your current rate and the rate then can again lend the money out at. Huge difference.

But if you're routinely knocking down the principal with extra payments, you'll end up paying less interest over the remainder of your term -- in some cases way less, plus when it comes time to renew your mortgage you'll be renewing with a much lower remaining balance to pay off than if you'd just been making the scheduled payments. So even if the interest rate is higher at renewal, you might end up better off sticking with your existing mortgage and not breaking it.
Not accurate. Everyone with good equity and around 2 years into a 5 year fixed rate will save by breaking, paying the penalty and taking a 3 year rate under 3%. As long as the lender is fairly standard in their IRD calculations.

As was noted above, everyone's situation is unique, I'm just pointing out that if you're making extra payments you should factor that into the equation as well.
I agree 100% Keep in mind that there are few people who can do this accurately.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #16
How do you figure the IRD, doesn't every bank uses a different method? Also, will new lenders cover the discharge and new legal fees?
Lenders are not consistent with this. I always have a client call their lender to get their penalty. Then you have to monitor the rates of their lender. Any change in their rates and the penalty also changes.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #17
This is interesting. I've always wondered if it was better to just pay down the mortgage or break it and use extra cash flow (put it on the debt through lower amortization) from the lower rate interest rate.
You have to do the math with both and do it properly. Again, if you are around 2 years into a 5 year fixed you will come out moving to a 3 year rate under 3%.
 

·
Registered
Joined
·
215 Posts
Discussion Starter #18
I think it really depends on the situation and the size of your lump-sum or extra monthly payments. I can pay up to 25% of my original mortgage amount in extra payments each year without penalty, which means I could pay off the entire mortgage before my initial 5-year term is up. But that's in theory of course; in practice there's no way I can cough up that much every year.

Let's say there's $150K left on my mortgage and I have two years left before my term is up for renewal. And let's say that each year I typically pay $15,000 in extra payments toward lowering my principal. If I break my mortgage today, the bank will charge me what they would have made if I were just doing my regular monthly payments over the next two years. But in fact I will have knocked the principal down by an additional $30K over the next two years, reducing the remaining balance and the interest that's calculated on it, so I have to factor that into the equation.

If the new rate is so much lower that I end up ahead over the entire 5 years of the new mortgage, then sure I would break the mortgage. And if rates start climbing up dramatically in two years I'll regret not having broken the mortgage. But honestly nobody really knows where rates are going to be in two years; it's not much better than trying to predict the stock market. It's all a gamble.
I won't touch on most of this, but is isn't always a gamble. I have locked in a savings of $5283. The only risk is getting into an accident on the way to the lawyers. :)

You have to do the math and do it properly.
 

·
Registered
Joined
·
3,061 Posts
Not correct. The lender will charge the IRD which is basically the difference between your current rate and the rate then can again lend the money out at. Huge difference.
I'll take your word for it since you're the expert on this -- it's weird though because when I checked with my bank last year about the penalty it all worked out to roughly what I would have paid in interest on the remainder of my term if I had stayed at my current rate.
 
1 - 20 of 45 Posts
Top