Jennie Dobbs signed her mortgage last year when interest rates were at their highest.
The Halifax resident found herself with a 6.09-per-cent mortgage for a four-year period with a Big Six bank.
But after a recent discussion with her banker, she realized she could save thousands in interest if she broke her current term and signed a new mortgage at 4.79 per cent. The prepayment penalty would be roughly $10,000 and would need to be paid up front. But she would save more than $25,000 in interest during the remaining 35 months of her term – netting her more than $15,000 of savings.
And that’s before considering more competitive rates with other mortgage providers, or the further interest savings if she were to make a lump sum payment after breaking her current mortgage.
In the past, she thought of a mortgage as something you only look at during renewal periods, but she’s now planning to refinance to save the maximum amount of money.
“The wake-up call to me was that you really want to set and forget your mortgage, that’s your natural inclination,” Ms. Dobbs said. “In this instance, if we had done that we could have lost a savings of $15,000.”
Mortgage brokers say homeowners often pay too little attention to their mortgage after they sign onto a term, and say they should be opportunistic when it comes to saving money on what is likely their largest form of debt. In the current environment of dropping interest rates, they say anyone who signed a mortgage during peak rates should be looking into whether resigning with a lower interest rate could be advantageous.
“I find it’s very unfortunate that most consumers will pay more attention to their investments and have those conversations about changing strategy, but not necessarily on their mortgage,” said Frances Hinojosa, a mortgage broker and chief executive of Tribe Financial Group.
“You should be reviewing your mortgage even on an annual basis just to have a quick check-in, or anytime there’s any sort of economic events that happen.”
Daniel Vyner, principal broker of DV Capital in Toronto, said whether or not a mortgage break will save you money depends on multiple factors, including the remaining term, the change in available interest rates and the type of penalty your lender charges for breaking your agreement.
Mr. Vyner said lenders typically charge either three months of interest or an interest-rate differential for the remaining time on your term, whichever is higher. Sometimes, this penalty can outweigh any savings in interest and breaking your mortgage will not be worth it.
In Ms. Dobbs’s case, the three months of interest is the greater charge. But as interest rates drop further, the interest-rate differential could become more substantial and eventually eat into her savings.
Ms. Dobbs would need to pay the penalty up front, but Ms. Hinojosa says the charge can sometimes be rolled into your mortgage.
One exception is if you have a high-ratio insured mortgage, which comes with the benefit of the lowest rates. You could lose your insured status if you increase your mortgage balance by too much, which could make you ineligible for low rates and cost you money in the long term.
For clients who decide breaking their mortgage is worth it, Ms. Hinojosa said she typically advises to keep their payments the same and instead reduce their amortization. This means they can insulate themselves from higher payments if rates go up when they renew, and if rates stay similar then they’ll be on track to pay off their mortgage more quickly.
Calculating the cost-benefit of breaking your mortgage can be complicated, and Ms. Hinojosa said it’s important to look for a broker that has experience with these calculations.
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