One of the most frequently asked questions by current mortgage holders is should I break my existing mortgage to capitalize on today's historically low rates?

First, it is important to determine what your penalty will be to break your mortgage prematurely. The lender will typically charge you either:

a) A three month interest penalty

OR

b) The interest rate differential (Note, if it's a high ratio insured mortgage (GE/CMHC), for the first three years of the mortgage the lender will charge you the greater of the two figures).

The interest rate differential refers to the difference between the interest rate you are being charged vs. the current interest rates. For example, if you have an 8% mortgage rate and today you can obtain a 5% mortgage rate, the bank will determine the difference in monthly payments between the two rates and multiply that figure by the number of months remaining on the mortgage to determine the discharge penalty. It is important to know if the bank is using the posted rate or discounted rate when calculating the penalty. If the posted rate is for example 6% and the discounted rate is 5%, your penalty will clearly be higher if the lender calculates your penalty based on the discounted rate.

Once you've determined your penalty, it's time to see if it make sense to incur this expense. If you have a short period of time left on your term (under one year), it may be best to let the mortgage run its course. In the interim, you should obtain a pre-approval from a financial institution for the period of time remaining on your existing term.

The key factor in determining if you should break your mortgage is if the savings significantly outweigh the costs. If your savings are nominal (under $1,000), in my opinion, it wouldn't make sense to break your mortgage because you have to pay the discharge penalty up front and the savings will be realized over the duration of the mortgage. If, on the other hand, you can realize substantial savings and possibly add several more years to your term (at these low, low rates) it would make great sense to do so!

Remember that every financial institution treats the potential discharge cost differently. If you have been a good long-standing client, the lender should take this into account. The financial institution I deal with is very accommodating and often times they will recalculate the existing mortgage rates and adjust the rate downward with NO penalty.

Some banks/trust companies (in an attempt to lure business away from their competitors) are offering prospective clients a cash back to pay for their mortgage discharge fee. The problem is when you receive a cash back, the lender will charge you the posted interest rates. By obtaining only the posted interest rates, you are losing out on the substantial rate discounts that are currently being offered (1% to 1.5% off the posted rates).

These are great times with respect to interest rates! Carefully consider all the options available to you and then enjoy the benefits of this wonderful interest rate climate!!!

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