All mortgages here in Canada carry a penalty if we pay out the mortgage early whether this is outright or via financing the mortgaged amount with another institution.
One of the Edmonton newsgroup threads where we sell odds and sods was bantering on about their mortgage rates approaching 3.00% per annum on a fixed rate mortgage. I had not realized that the rates had dropped down that much for the “unspoken” rates.
Right away a call went into our mortgage holder to see what the terms were if we refinanced via a third party or whether it was possible to do so within their institution.
It was worth the check.
The values to consider are:
- Cost of the interest on the current principle at the current rate for the entire mortgage term sought after (5 year, 10 year, etc).
- Interest savings on the principle by comparing the current rate against the new rate over the duration of the mortgage term (savings can be in the 10’s of thousands for a 1% reduction in the interest rate depending on the mortgage principle amount).
- In-house refinance penalty versus third party buyout penalty. In our case the in-house penalty is about 45% less than the third party buyout penalty.
- Gross monthly payment reduction (Accelerated BiWeekly is the best way to pay down the principle).
Once we crunched the numbers, it was a pretty clear thing that we needed to go forward with an in-house refinance based on the offer we received from the institution that facilitated our mortgage.
We just needed to come up with the in-house refinance fee which was very doable.
We can now be quite comfortable knowing we have a good rate on our mortgage going forward. This is especially important since we have no clue how things will be over the next number of years economically, inflation wise, or interest rate wise.
Most online banking sites have mortgage calculators in place. Punch in the numbers to see what a point or even two points can save you on your mortgage interest and payment reductions!
Microsoft Small Business Specialists
Co-Author: SBS 2008 Blueprint Book