These 3 clients broke their mortgages, paid a penalty, and still saved between $9,000 and $26,000!
Fixed mortgage rates are at an all-time low. If you have a mortgage that is over 3.09%, then you should consider breaking it, paying the penalty and getting into today’s lower rates.
That’s short answer… the full answer is a little more complex but, it’s really just simple math. If the savings is greater than the cost to break, then the answer is obvious. You should do it! I’ll give you some real life examples of clients that could be savings huge $$s today if they paid their mortgage and the penalty and went into a new lower rate mortgage…. check out these success stories….
EXAMPLE 1…$710,000 balance @ 3.59% with 8 yrs to go.
These clients took a 10 year fixed rate mortgage 2 yrs ago. Today, they can can into a 5 yr fixed rate at 2.59%. So, here’s what this looks like….
Current monthly payment is $3773 with 23 year amortization remaining.
Balance remaining after 5 years from today is $600,870.
Penalty to break mortgage is $6372.
New mortgage rate of 2.59% for 5 years.
New monthly payment using the same 23 year amortization remaining is $3412.
Balance remaining after 5 years from today will be $589,247 *(notice how the balance is lower?).
Savings on payments is $21,660 PLUS the balance remaining in 5 yrs is $11,623 lower... for a total savings of $33,283… less the penalty to break the mortgage, $6372 = a NET SAVINGS OF $26,911 OVER THE NEXT 5 YEARS.
EXAMPLE 2…$520,000 balance @ 3.89% with 7 yrs to go.
These clients took a 10 year fixed rate mortgage 3 years ago. They wanted to just lock in a rate as they felt rates could jump over 5% or 6% in the next few years.. Of course, that didn’t happen. So here’s what their savings looked like…
Current monthly payment is $2926 with 22 year amortization remaining.
Balance remaining after 5 years from today is $437,191.
Penalty to break mortgage is $5057.
New mortgage rate of 2.59% for 5 years.
New monthly payment using the same 22 year amortization remaining is $2582.
Balance remaining after 5 years from today will be $426,228 *(notice how the balance is lower?).
Savings on payments is $20,640 PLUS the balance remaining in 5 yrs is $10,963 lower… for a total savings of $31,603.. less the penalty to break the mortgage, $5057 = a NET SAVINGS OF $26,546 OVER THE NEXT 5 YEARS.
EXAMPLE 3…$610,000 balance @ 3.09% with 3 yrs to go.
These clients took a 5 year fixed rate mortgage 2 years ago. The rates at the time were extremely low and they wanted to lock in a fixed rate. Here’s what their potential savings looks like if they were to break their mortgage today…. (for this example, we are going to assume their current rate of 3.09% will last for another 5 yrs to make this example easier to follow).
Current monthly payment is $3084 with 23 year amortization remaining.
Balance remaining after 5 years from today is $511,332.
Penalty to break mortgage is $4712 (assuming 3 mths interest).
New mortgage rate of 2.59% for 5 years.
New monthly payment using the same 22 year amortization remaining is $2932.
Balance remaining after 5 years from today will be $506,255 *(notice how the balance is lower?).
Savings on payments is $9,120 PLUS the balance remaining in 5 yrs is $5,077 lower... for a total savings of $14,197.. less the penalty to break the mortgage, $4712 = a NET SAVINGS OF $9,485 OVER THE NEXT 5 YEARS.
These are real life examples. The savings potential is huge today. But there is also another thing to consider.. Interest rates are at record lows… We don’t know how much longer this trend will continue. I think it’s safe to say that in 3 or 4 years, interest rates could be higher. If your mortgage rate is higher than 3.09%, you should review your options with an experienced mortgage broker today.
**** oh yeah, that footnote… So here’s another tip and little known FACT. The lower your rate of interest, the faster you pay off the principal. Notice how the remaining balances, after 5 yrs, is lower with the reduced interest rate. Most consumers don’t realize this. They think the balance owing after 5 years will be the same, no matter what the interest is. This is another hidden advantage of being in a lower rate for as long as possible. You pay your principal FASTER!
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis 416 224 0114 steve@mortgagenow.ca
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As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.
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The penalties to break the mortgage seem quite low… Thought they would be much higher based on previous discussion…
Hi Kevin, it depends which lender you are with and which product you currently have. The BIG SIX BANKS penalties could be much higher.
So, these 3 example are not with the BIG SIX BANKS?
Hi Kevin, that’s correct. These lucky clients were not with the BIG SIX BANKS. However, borrowers should always find out what the exact penalty is. It may still be worth it.
Record billion $ profits year after year after year. Prior, during and after a recession… And unfair penalties, higher bank fees follow.. It isn’t bitching, it’s just a fact..
I noticed a logic problem (and resulting math problem) with your first example. If the clients break their mortgage with current bank, and have a penalty, then their new mortgage will have a starting balance of 710000 + 6372 (or at least I would consider this to be the best ‘apples-to-apples’ comparison).
So their new monthly payment will be $3443, and their balance remaining after 5 years will be $594536. Their net benefit from refinancing will be $19800 (savings on payments over 5 years) + 6334 = 26134.
I would consider a BETTER comparison to be if they refinanced, added the penalty to their new mortgage, and kept their monthly payments the same (decreasing the amortization). In that case, their balance remaining after 5 years would be $573293, for a net benefit of $27577.
Of course, this is based on them getting the REALLY LOW penalty that you mentioned in your example (based on 3 months interest). these days most banks use the greater of 3-months-interest OR Interest-rate-differential (IRD). And an IRD-based penalty will quickly wipe out any potential gain from refinancing. I would recommend contacting your bank to find out what your penalty would be (and get it in writing, because they’ve been known to get it wrong on the phone) before looking any further.
Thanks Michele,
I suppose I figure consumers would pay the penalty out of pocket given their new lower payment will allow them to recoup that penalty in a short period of time.. still, that savings is extraordinarily large.. and remember, if you are in a 10 year term, the penalty works out to 3 months interest today.. even with the BIG SIX BANKS and their inflated penalty calculation.. but you are right.. always check to confirm the penalty..
Steve
Can you provide some advice on homeowners currently locked in at a fixed 5 year mortgage rate of 3.78%, but planning to move around the end of the term (summer of 2017). Does it make sense to break mortgage with scotiabank? Or just wait it out and shop around later?
Hi Justine, yes, I can offer some advice.. it’s really a simple math calculation.. I’ll reach out to you and we can do some math to see if it makes sense.
Steve