Should I break my mortgage term and refinance?
Marci • May 8, 2013
Do you cringe every time you see the posted mortgage rates because they are higher than your current rate? If you do, it’s time to consider breaking your mortgage contract.
It’s called “breaking” the contract because you are terminating your original mortgage contract. The decision of whether to break the contract or not must be based on the numbers – and I don’t just mean the rate – it’s also about the amount of your penalty and the savings you would achieve in switching to the lower rate.
When you speak to your mortgage expert you need to assess how much money you will save at the new rate. From this savings amount, deduct the penalty you will owe. If there is money left over after deducting the penalty, this is the reason you will be considering breaking your contract.
Is this amount worth starting over with a new mortgage? Do you want to reduce the mortgage payments? Reduce the mortgage amortization? Or do you need money to pay for renovations, investments or a vacation home? Sometimes the mortgage principal can be increased without adding to the length of the amortization. Look at whether a second mortgage, HELOC or line of credit would be a better option.
Understand how the penalty works. Whether you change lenders, or stay with your existing lender, you will pay a penalty – not to mention out of pocket expenses that come from establishing a new mortgage contract. Learn more on how mortgage penalties work by reading about IRDs – the technical term for penalties.
To determine if breaking your mortgage contract is right for you, work with your mortgage expert to understand the overall financial picture. Ask all of the questions in this exploratory stage to know exactly what you will be getting into. This includes knowing what your new mortgage payment will be to help determine the impact on the household budget. You must be saving enough in the long run to make it worthwhile to break the contract.
Rate alone isn’t the whole story. Know what a reduced rate will mean in terms of your overall finances before making a change. Ask Marci…
marci@askmarci.ca
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