Talking more about your mortgage questions!
In this video, Chris Molder, a Toronto mortgage broker, sits down to talk about how increasing mortgage rates can present an opportunity to help you refinance a fixed-rate mortgage for a lower rate.
Why rising rates might make it easier to refinance your fixed mortgage for a lower interest rate?
Don’t feel like watching? Find the full transcript below!
Are you thinking it’s time to refinance a fixed-rate mortgage and worried about penalties? This post is for you!
How can rising rates help me lock in a lower rate?
Chris: [00:00:00] Over the past few weeks, there’s been a lot of discussion about changing rates and that fixed rates are trending upwards. So I think it’s a good time to re-evaluate this question. Should you refinance your mortgage in pursuit of a lower interest rate? And a very counterintuitive notion that actually increasing rates might present an opportunity to make it worth your while to do so. So let’s dive in a little bit deeper.
Chris: [00:00:25] Refinancing your mortgage for a low rate is really just a question of expense versus savings. So on the expense side, you have your interest penalty to break your current mortgage, plus the associated transactional costs like appraisal, legal fees. And then on the savings, you have the difference between your current interest rate and the lower interest rate that you’re going to be renegotiating your mortgage at.
The penalty is the problem
And this is where the problem lies for most people trying to refinance their mortgage. Because, if you’re currently in a fixed-rate mortgage, the penalty is calculated as the interest rate differential or IRD. And the way that penalty works, in a nutshell, is the lender takes your current contract rate, whatever you’re paying right now on your mortgage, and then bases the penalty on the lower rate, the amount of interest that they’re foregoing by you paying them back early. So the penalty is essentially the same amount as the savings that you’re pursuing. So they wash out and usually the penalty is more expensive than the savings.
Chris: [00:01:28] And so this is where the opportunity exists because as rates come down from your current rate, your penalty gets bigger and bigger, larger and larger, more expensive. But as rates start to creep up, that interest rate differential starts to shrink. And so, therefore, your penalty is smaller and there are opportunities that exist, especially if you consider switching from a fixed rate to a variable rate where there might be some interest savings that you can enjoy at the moment.
A mortgage broker can help!
So if you want to learn more about your specific scenario, then I have an invitation for you. I need four pieces of information to guide you through. Whether refinancing makes sense or not. I need, number one, a quote of the penalty to break your existing mortgage. You’ll have to call your lender to get that. Number two, we need the current balance of your mortgage, the maturity date of your mortgage, or the original setup date. Number four, the current monthly payments that you’re making. And with those four pieces of information, we can plug it into a calculator that very quickly tells us, are the savings enough to offset against the expense?
Chris: [00:02:35] My name is Chris Molder. I’m a Toronto mortgage broker and the door’s always open to you. If you have any questions or concerns about refinancing a fixed-rate mortgage or anything else mortgage-related, I’m just a phone call or an email away. Bye for now.
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