Milton Real Estate - Katherine Barnett, Broker

How To Take Advantage Of Lower Mortgage Rates

  • Katherine Barnett
  • 13 April 2016

Spring and summer are nearly here. It’s often the time when more people are shopping for a home and when banks start to offer more competitive mortgage rates. But if you already own a home, how can you take advantage of lower rates?

You can break your mortgage and refinance it at a lower rate, but there are pros and cons of doing this.

Advantages

There are a number of benefits of refinancing your mortgage, including:

Lower payments/interest costs: A lower interest rate on your mortgage could mean your payments will be lower and you’ll also likely pay less in total interest than had you kept your current rate. Try ratehub.ca’s mortgage refinance calculator to estimate what your savings could be.

Pay off your mortgage faster: If you’re making more money than when you bought your home, you may decide you want to pay off your mortgage at a faster pace. You could do that by shortening your amortization period.

Access home equity: If you’re considering purchasing an investment property or renovating part of your home, you can access the equity in your home (that’s the value of your property minus your mortgage balance) to help pay for either.

Consolidate debt: If you have any other debt, such as a credit card balance, a car loan, or a line of credit, you can consolidate it into your mortgage. By consolidating your debt, you’ll pay less interest and you’ll probably have lower monthly payments on top of a lower interest rate. Still, you’ll have the same level of debt.

Disadvantages

Before deciding whether or not to break your mortgage, you should be aware that while there’s a potential to save a lot of money, there are also costs involved:

Mortgage prepayment penalty: If you have a variable-rate mortgage, you’ll only have to pay three months’ interest. But if you have a fixed-rate mortgage, your prepayment penalty is the greater of three months’ interest or the interest rate differential (IRD). To determine the IRD, lenders look at the mortgage rate you have currently, the number of months left in your term, the rate they could charge you for a new mortgage term similar in length to the remainder of your term. You can estimate the penalty you’d have to pay using ratehub.ca’s mortgage penalty calculator.

Mortgage discharge fee: If you decide to use a different lender, you’ll have to pay a fee to discharge your mortgage from your current lender. Lenders set their own fees, which can vary by province. These fees are typically in the $200 to $350 range.

Mortgage registration fee: You have to pay a mortgage registration fee whether you’re staying with or leaving your current lender. Your lender removes the current mortgage amount from the title on your home and re-registers it with a new mortgage amount. This fee is usually around $70.

Legal fees: You’ll have to consult with a real estate lawyer when refinancing your mortgage. He or she will check your mortgage’s terms and conditions, register your new mortgage, and do a title search to ensure there aren’t any liens against your home. Legal fees for refinancing your mortgage can be in the $700 to $1,000 range. But if your mortgage balance is more than $200,000 and you want to switch lenders, your new lender may pay these fees.

While large lenders may soon start offering lower rates and you could pay less if you break your mortgage, it’s best to do some research to find out whether or not you’ll benefit.