These 3 clients broke their mortgages, paid a penalty, and still saved between $9,000 and $26,000!

While I originally posted this article in September of 2015, I think now is a good time to take another look.

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 the 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 whose savings could be 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 years to go.

These clients took a 10 year fixed rate mortgage 2 years ago.   Today, they can turn that into a 5 year 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 years 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 years 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 years 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 years 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 years 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 years 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, and 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