Canadian mortgage rates are low and could be getting lower following a quarter of a percent cut in lending rates from the Bank of Canada. While a 1/4th percentage point will invariably save you money on your home cost if you are a new buyer, if you have a variable rate tied to bank prime, you may be in a position to get lower payments without changing your mortgage. With lower mortgage rates, is it prudent to get out of your current mortgage and get a lower rate?
- How much will it cost you?
Penalties exist and are placed in your contract to prevent certain actions. Mortgages with variable interest have simple penalties equal to three months of interest. Fixed mortgages are more difficult in that the penalties can accrue to amounts as high as several thousands of dollars. The rate of penalty is calculated using an Interest Rate Differential (IRD). There are calculators available online that will give you a break-even figure to decide if the mortgage penalties fit into your budget.
- Can you lower your IRD penalties?
If you qualify or currently have access to large lines of credit, you can reduce your penalties by opting for a prepayment plan. Prepaying your mortgage will reduce the mortgage rate, which lowers your penalty IRD.
- How do prepayments work?
With so many options, knowing the right one for your situation can make all the difference to saving you money in the long term. The average lump sum plans allow annual prepayment with a minimum of 10% and a maximum of 20% of the mortgage loan. Another detail, lump sum payments must be made at least 60 days prior to any refinance so borrowers planning to refinance their mortgage should make any payments as soon as they make plans to refinance.
Make your plans according to your budget and financial health. Do not rush out to refinance or access lines of credit without first calculating the most advantageous course of action for your situation.