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Discussion Starter #1
What should i look at when considering whether to break a mortgage? Should i look at how much the monthly payment would be reduced, how much has been saved over the term, or over the lifetime of the mortgage? My fee would be relatively low at 3000. But on the other hand would i be better off making a prepayment with that amount? My mortgage is small at 82000, my rate is 3.39% and i have 11 years left on my mortgage and 2 years left in my term.
 

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Take the balance of the mortgage and calculate the difference in interest costs between your current rate and the new rate. I calculate the annual savings, then divide by 12 to Give a monthly savings. Then take the monthly savings and multiply by the number of months left on the term. If the Savings are more than $3000, then I’d do it. If you have extra cash lying around, you can make a prepayment first, then break the mortgage. I can’t recall, but I don’t think the banks will account for the pre-payment when breaking unless you make it two separate transactions. This would lower the penalty a Bit.
 

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Is it that you intend to break the mtge. to refinance at a lower rate? How much lower?

If you bust it to get a rate drop from 3.39% to 2%, you will save 1.39% on $82,000 for 2 years (if there are 2 years left on the term). That results in savings of $2,279.60. Does not seem worthwhile to pay $3,000 to achieve that result.

Or do you think you can now get a mortgage of around 2% for 10 years (which I would doubt) and you expect rates to go up quite a bit?
 

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Don’t forget you can do a prepayment before breaking a mortgage which would reduce your penalty.
 

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Discussion Starter #5
Thanks everyone, as Mukhang has said at this point i don't think its worth it based on estimates i have given. I may try a prepayment as just a guy suggested. Just to be clear, reducing my payment won't reduce the overall amortization of my mortgage right? so all i should look at is the difference between my current payment and new payment?
 

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Its been years since I was in the business but I seem to recall something to the effect of "the greater of 6 mos interest or the interest rate differential". Can't remember, its been 19 yrs! 6 mos interest would be close to $3,000. and as mentioned above you would be losing money. There also used to be something called "blend and extend" where you could extend the term, say to 5 yrs, and they would blend your current rate of 3.39% with their current 5 yr rate. Doesn't really make sense to me unless you think rates are going to go up by the time your mortgage matures.
 

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If you don't have other debts, and with the size of remaining mortgage, you're unlikely to save anything by refinancing to a lower rate. Definitely take advantage of prepayment options. If you don't need something else like a HELOC either, then like I said, even at 3.39% you're not likely to save by switching.
 

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It is strictly a math exercise. Saving minus penalty. Not rocket science or an elongated decision tree. The only gotcha would be to ensure that the financial institution's calculation of penalty is in agreement with the actual mortgage document. Anyone can make an error.
 

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Discussion Starter #9
Thanks i think all i can do now is make prepayments to reduce interest and keep an eye on interest rates to see if it is ever worth it to break it due to rising rates. All i can say if you are reading and thinking of buying a home is do not bank with a big 5 bank and do not get a 5 year mortgage as they have the worse penalty. I have to live with my decision now and the only positive is my mortgage is small so damage is minimal.
 

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Do not fret. It could easily go the other way. The thing to remember is that the big banks, on our experience, can be flexible with mortgages. Especially when it comes to inserting reasonable changes relating to pay downs and on increasing the monthly premiums. It can depend on the mortgage officer that you deal with. Some are experienced, some flexible, some only know to say no-take our terms or leave them. If you get a no, always ask them to escalate to the infamous downtown or head office for a second opinion. Failing that, shop, shop, shop.
 

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Do not fret. It could easily go the other way. You can only do the best you can at any point in time. The trick is to keep moving forward vs. looking in the rear view mirror.

The thing to remember is that the big banks, inn our experience, can be flexible with mortgages. If you ask or if you insist. Especially when it comes to inserting reasonable changes relating to pay downs and on increasing the monthly premiums. It can depend on the mortgage officer that you deal with. Some are experienced, some flexible, some only know to say no-take our terms or leave them. If you get a no, always ask them to escalate to the infamous downtown or head office for a second opinion. Failing that, shop, shop, shop.
 

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All i can say if you are reading and thinking of buying a home is do not bank with a big 5 bank and do not get a 5 year mortgage as they have the worse penalty. I have to live with my decision now and the only positive is my mortgage is small so damage is minimal.
You have no idea how much money someone can save by taking your advice and experience.

And yes you're very lucky you're not facing 30 or $40,000 in penalties, because that's no uncommon unfortunately. A lot, and I mean a lot, of people fall for a low rate promise, but fail to see the big picture and end up paying big time.
 

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Thanks i think all i can do now is make prepayments to reduce interest and keep an eye on interest rates to see if it is ever worth it to break it due to rising rates. All i can say if you are reading and thinking of buying a home is do not bank with a big 5 bank and do not get a 5 year mortgage as they have the worse penalty. I have to live with my decision now and the only positive is my mortgage is small so damage is minimal.
Unfortunately, this is a learning for most. When you take a 5 year mortgage, you need to be prepared that rates may go lower. They may also go higher. Either way, the penalty calculation should have been outlined in your mortgage agreement. You could do a blend and extend, as was mentioned earlier, but the penalty is Rolled into the new rate. I can’t see you blaming the bank or the term. You paid a premium for the peace of mind your rate wouldn’t go higher. People who choose shorter terms or variable are taking a risk and getting a discount (lower rate).

the important thing to remember is to decide what’s more important.....peace of mind or possible savings. And just because a variable is good for one person, doesn’t mean it’s good for another. Or vice versa.
 

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At these rate, I’m not sure why anyone complains in the first place.
 

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given the size of your mortgage and time left on it, I would go aggressive on prepayment. Before you know it, it'll be paid off before your next renewal.
 

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Thanks everyone, as Mukhang has said at this point i don't think its worth it based on estimates i have given. I may try a prepayment as just a guy suggested. Just to be clear, reducing my payment won't reduce the overall amortization of my mortgage right? so all i should look at is the difference between my current payment and new payment?
Sorry, I just signed with a big 5 bank.
My penalty to break today is 0.372% of my outstanding balance.

Their rate was within 0.15% of the online banks you see advertised.

For my mortgage, it literally isn't worth the hassle to try and switch institutions, plus I get a nice little brick building with people to talk to if I have problems.
 

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Discussion Starter #17
If you can believe it in my case i went through a mortgage broker and they paired me with TD. This just shows even if you have a mortgage broker you need to do your homework and ask lots of questions. On the upside, i'm making a biggish mortgage prepayment mid november when a gic comes due. And soon 1/2 my mortgage will be paid off!
 
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