With mortgage rates becoming more competitive, it is common for many families to wonder if they would be better off breaking their current mortgage and obtaining a new one at a better interest rate. On the surface, that sounds like an excellent strategy, but it is essential to “do the math.” You need to understand what prepayment penalty fees are involved, which can depend on whether you have a variable-rate or a fixed-rate mortgage. There can also be other fees involved, as well as repaying any cashback amounts, and you may need to meet the more stringent mortgage qualification standards implemented in Canada in 2017.
Prepayment penalty fees can be anywhere from a few hundred dollars to several thousand. Again, it makes a difference which type of mortgage you have. With a variable-rate mortgage, the penalty is three times the monthly interest. At the start of a mortgage, a large portion of your monthly payment is interest, so you can imagine how costly it would be to payout the near equivalent of three mortgage payments. The calculation for the penalty for a fixed-rate mortgage is more complicated. It is based on an interest rate differential with a penalty generally higher than that of a variable-rate mortgage.
As for the new qualification standards, referred to as a “mortgage stress test,” you will need to be able to qualify for your new mortgage as though the interest rate was 2 percent more than what you’ll be paying. You could find it challenging to get approved for a new mortgage without having extra funds to make up for the difference.
The good news is that, here at Donna Mullen & Associates, we work diligently to help our clients understand mortgages better. Ideally, we assisted you in the past and helped you avoid mortgages with complicated and detrimental prepayment penalty clauses in the first place. Barring that, we can help you figure out if you’d benefit by breaking your mortgage and learn about mortgages outside the six retail banks and their stress test hurdle. Through education, we are working to improve the Wasaga Beach, Ontario community by helping its citizens take charge of their financial goals. Reach out to us today to learn more about mortgages than you’d ever expect to learn from a traditional mortgage professional.