I bought a three bed flat in 2009, with 25% down, and a mortgage at 2.94%. That rate was already amazing and I could have slept soundly in my new home without ever thinking about getting a cheaper mortgage. Until I found a little button on my online banking that was saying ”check out our mortgage range”. I was curious and the offers were addressed to me personally, with the option to change mortgage with just a few clicks!
I didn’t understand why the bank would do that, and offer me a cheaper mortgage, probably because of a time of high competition, but half an hour later, I had slashed my rate to 2.29%, with a $150 fee. I would make back the fee money in just a few short months.
Now without the help of my bank, how do you proceed to explore options and refinance your mortgage? Mortgage rates are at an historical low, it is time to take advantage of it.
Read your contract
Some mortgages will have penalties for leaving early, others are set for a couple of years or more. Set up a reminder in your agenda a month before your deal is up, and start looking for mortgage options.
Include all fees in your calculations
A refinance sounds attractive at first because you will get a lower interest rate on your mortgage, and reduce your monthly payments. But it generally comes with a plethora of administrative fees. Saving $10 per month in interest for a $1000 fee means it will take you more than 8 years to break even.
Consider shortening your term
I took a 30 years mortgage at first. With a lower rate, I could keep my payments the same and repay it a few years early. If your rate is going to be considerably lower, you may be able to afford repayments on a 15 years mortgage and save a lot more in interests.
How much will you save?
You can use a mortgage calculator to determine that easily. Depending on the duration of your loan and the interest rate, you can save a lot. For example, for a $200,000 mortgage at 3.5% over 20 years, a rate drop to 3% will save you more than $12000 in interest over the course of the loan, or $50 per month.
Keep your repayments the same and put those extra $50 towards your debt, and you can save an additional $4151, and pay it off 13 months sooner!
If you are unsure about the whole process, a mortgage broker can help you understand it all.
Post written by me and brought to you by mortgagerates.ca