Well I received an interesting letter from my mortgage broker last night. He played out (for the first time) a scenario with a 35 year amortization… my first thought was.. are you freaking crazy??? But I believe that it deserves a closer look to see what my best bet would be to achieve my goal of mortgage free within 10 years.
My current mortgage situation is that of a 5.10% interest rate for 2 more years, that said – I if I were to simply make the regular payments my mortgage would be paid off in 21 years, 7 months. That’s without any pre-payments which I try to make at least one yearly.
What’s worse is that if I was to refinance my mortgage right now – I’m stuck with a HUGE penalty of almost $5600. This is absolutely ridiculous if you ask me, but….
The new payment just sent to me is one that is variable rate and 35 years starting at 1.75% (Prime less 0.50). This makes the payment less than half of my current mortgage payment. For example if I was paying $1000 now, with this rate it would be $500.
So what advantage does that have? For me.. I see two things:
- I keep paying the mortgage like I am right now – and I’m making a prepayment every 2 months. This would accelerate the pay down of the mortgage much faster than my current mortgage
- With the $500 payment, it would seem that if some emergency happened that I would still be ok to ‘pay the bills’ which is obviously important.
So that’s why it’s not a crazy scenario once I took a hard look at it. Looking at this scenario again, it would appear that I would be able to make $6000 in prepayments every year without doing anything different if I kept my payments the same, and that’s without any other prepayment.
With the current mortgage that I’m in – I just calculated that for the coming 12 months I would pay over $6700 in interest! So the penalty I would incur would be a moot point really.
So what I’ve done now, is calculated what would happen if I made pre-payments of an extra $500 a month or $6000 a year on the 35 year amortization. This sounds like a lot, but in actual fact it’s no different than what I’m paying now, in fact it’s less. The results? I would have my mortgage paid off in 9 years if done bi-weekly and the rates stay the same. Obviously that’s not going to happen, but truth be told I can see them staying relatively low for at least the next 5 years, and by that time – I’ll have paid off over ½ the mortgage.
Would love to have other people comment on this idea, I don’t like jumping into any decision until I’m well informed.
I don't really understand what you decided to do but I was in the exact same position as you. 2 years left and a penalty to get out of the current rate. I've spent alot of time on this over the past month.
The penalty is equal to the interest savings for the remaining term but with more going to the principle, it lowers your amortization period which still results in big savings.
The risk is how long will the prime rate stay as low as 2.25%? Even a 1% increase will start to make this look less attractive. Based on my numbers, it needs to stay below 3% for at least another 12 months and I took that risk.
Hey Buddy,
I haven't actually 'officially' decided on what I want to to, but truthfully it's leaning towards a refinance.
I would actually save almost double the penalty over the two years (this coming up year alone I would be paying almost $7000 in interest!) which gives a bit of flexibility for the interest rate to creep up a bit and still be way in the advantage.
In year one of the new variable rate, I would have paid off over $5000 more on the principle if I were to keep the payments the same as right now (making prepayments in the amount of the difference), but that jumps to almost $15000 difference after year two.
It's quite obvious that rates will be on the increase soon, and I'm aware of that as well – in fact that's the only thing that would hold anyone back on this.. however I do not think it's going to jump up at a crazy alarming rate.
Hopefully by that time I'd have a significant chunk out of my mortgage anyhow.
So did you get prime less 0.50?
we were told refinancing and early renewal for a better rate is not the same thing.
Assuming prime stays low, the interest on our remaining term of 29 months drops from $18000 to almost $6000.
I'm not rate expert but I'll be surprised if the rate increase will be as fast as it dropped. If it does start to climb, there is always the option to go fixed at no penalty.
Rate history: http://www.canequity.com/mortgage_rate_history.stm
Good interest calculator: http://www.canadaprimerate.ca/canadian-mortgage…
I've been contemplating the very same thing. Our mortgage is young, we're a mere 13 months into a 5-year fixed mortgage @ 4.19%. I think some people think I'm being greedy, with 4.19% being a historically low 5-year fixed rate. However, current 5-years can be had for 3.64% or less. Personally, I'm thinking a VRM switch would be more beneficial, and not just for now but for the long term. I'm not sure how low I could negotiate a VRM rate (P-0.5, would be lovely!) but initial discussions at my bank were for P-0.2 (i.e. 2.05%). Crunched some numbers and found that switching to VRM even at 2.05% and maintaining the same payments we're making now would chop our interest costs by just over 50% (although that would surely shake out to less of a difference as rates start to rise)…with a young mortgage (read: big principal!) that's a LOT of money we could avoid chucking to interest. Penalty to break current FRM is big ($8400), but I still think we could make up the difference. We could handle the payments on our current mortgage + penalty cost if the interest rate was even 6%, and I don't think it will get quite that high in the next 3 to 4 years when we will be aggressive with prepayments to take an even bigger chunk out of the principal. Bank cautioned that once prime bumps up as expected this summer, discounts to prime might be even bigger…but I'm always skeptical of the banks. That being said, banks are encouraging clients to fix their VRMs, which makes me think it's to THEIR advantage, not mine, to be in a fixed rate mortgage! We all know rates are going up, but the suggestion that discounts to prime might be increasing? Not so sure… Right now, we're just mulling it over…have you made a decision yet?
Hey Len, even though the “experts” say that interest rates may stay low over the next several years, what if interest rates do go much higher? Can you and your family stomach the risk?
It seems like you have worked out the numbers, if it makes sense to suck it up and pay the penalty, then go with it!
I would personally think the penalty is not worth going from 4.19 to 3.64 and maybe not even worth going to variable as it only has to increase 1% to get you back into the 3.5 range.
It would be interested to see the numbers but its possibly better to put that 8400 directly on the mortgage.
I haven't “officially” made a decision yet – but I've been in talks with my broker quite a bit. I have asked about fees, potential increase to consolidate other loans, etc..etc..
If all works out, I'm sure my broker would be happy to have a new client (especially if he can get you that prime-0.5%
Anyhow I'll post to advise.
Cheers!
I agree — not worth it to go to a fixed at 3.64. We are considering the change to variable because the short term savings appear to be significant enough to still get us ahead even as interest rates go up by the end of our term. Truthfully, we were leaning towards VRM when we first signed, but the mortgage environment was quite different a year ago — discounts to prime were non-existent (in fact, VRMs were P+ 0.6ish!) and all the talk was about how 4.19 for a fixed rate mortgage was amazing, historically speaking. First-time buyers, we went for security in a fixed rate, I guess. Still waiting to pull the trigger on this decision though…have simply been too busy to get in to talk to the banks again!
You know you're exactly right – I remember sitting down and talking about the rates of mortgages and they were telling me about how it was prime + whatever.. I thought.. WHAT?? I had prime – 0.75% before and man.. do I wish I kept that! (back about 7 years ago).