Toronto Star columnist Ellen Roseman was at it again this morning in the Business section of the Star. Her column gave some pointers to borrowers who are thinking of refinancing and breaking their current mortgage.
1- Find out what kind of penalty you are facing. If you are currently in a variable then the penalty is only 3 months interest. If you are in a fixed then you are charged the greater of 3 months interest or interest rate differential.
2- Find out how your lender will charge you IRD. Will they use posted rates or discounted? This can make a big difference and unfortunately if you are dealing on the branch level bank employees haven't been able to disclose to our clients how they are calculating IRD. Frustrating experience.
3-Estimate the penalty. Keep in mind that even after you get quoted the penalty it is still subject to change as interest rates may move by the time you payout your exisiting mortgage. There's a link to an online calculator at www.ellenroseman.com (search for Mortgage Penalty).
4-Calculate your savings. It is not the easiest calculation to make so I encourage you to contact a mortgage professional or visit the website of Canada's Office of Consumer Affairs. York University professor has designed a calculator. Its not perfect but it will give you an idea as to how much you can save.
5-Take advantage of your prepayment priveleges if you can to reduce the penalty amount.
6-Keep in mind that your new mortgage may have a lower interest rate but becareful the lowest rate isn't everything. Lenders offer very low rates but sometimes the low rates come with a "no frills" mortgage product meaning there are no prepayment priveleges and there is no way of breaking the mortgage without paying all the interest due over the term of the mortgage. That is even worse than IRD!
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