By Lindsay Smith/Columnist
As a full-time realtor I spend quite a bit of time in my car, showing homes or visiting sellers getting their homes ready to sell. Over the past few days, I have heard a radio ad from a mortgage brokerage offering a five-year mortgage below 1.4 per cent. Having a mortgage renewing in less than a year it caught my attention. Let’s do a bit of digging to see if it makes sense to renew early, discharge it and move elsewhere, or try to renegotiate a new mortgage with my lender.
There are several options available to anyone who is at the end of a five-year mortgage term. A homeowner can:
- Renew early, negotiating a new mortgage rate with their current lender.
- Discharge their mortgage, pay a penalty and move to a different lender.
- Pay a penalty with the current lender to break the mortgage allowing you to take on a lower mortgage rate.
- Win Lotto-Max and pay off their mortgage.
There are several factors at play when you are planning on altering a current mortgage, and given the complexity of mortgages, breaking down the elements to simple items helps to determine the best decisions.
Mortgages have four basic components. The amount of money being borrowed, the mortgage rate, the amortization period, and the length of term prior to the mortgage rate renewing.
If you are considering renewing and not changing the mortgage amount, to break the mortgage would require the greater of, either a three-month interest penalty or an interest rate differential, (the “cash” difference between the rate you have and the current rate times the months left in the term.) A quick check on the costs of discharge versus the savings on a lower rate will determine if this is a good option. One downside of breaking a mortgage and moving to another lender is the new lender will qualify you using the “stress test.” This is qualifying an owner on a rate higher than the discounted rate. If you have had any employment issues this may not be the easiest option to pursue. One would think that by shifting a mortgage from one lender to another, making no changes other than rate and the length of term, a “stress test” would not be required, however, this has been standard practice for the past few years.
One of the motivating factors in moving from one lender to another is the rate. Moving lenders would likely ensure you receive the lowest possible rate as a new customer, however that rate may not be available by staying and renegotiating with your current lender. One would think that by staying with a lender and securing a longer term mortgage and a lower rate would be reason for the lender to lessen the discharge penalty, however, this is rarely the case. (An FYI, in the USA discharge penalties are rarely if ever applied to breaking mortgages.)
Chatting with Bob Pinkney from Oriana Financial (firstname.lastname@example.org) his advice to clients who are considering moving their mortgage to a variable rate loan with a new lender is to take into consideration the situation of the homeowner prior to making any decisions. Variable mortgages can be risky if the rates start to move upward. The homeowner may be stuck in a mortgage that is much higher than one with a five-year fixed rate and it may be costly to either lock into a fixed mortgage or to move to another lender.
The Bank of Canada has indicated mortgage rates are going to remain low for a couple of years, and with rates being as low as they are, it may prove to be more of a risk to have a fluctuating rate rather than a guaranteed low rate for the next five years.
One thing worth discussing is when a homeowner is looking to renew their mortgage and tap into some equity to help with their other debts or living costs. Again, this is viewed as a new mortgage at either their own lender, or by choosing to move to a new lender, they would be forced to requalify using the stress test. This is sometimes a good option if a homeowner needs some financial relief. By accessing your equity, it can be a cost effective way of raising much needed cash, (which many are looking for in this pandemic.) Over the past five years, the average detached home in Oshawa has increased over $300,000. In the event a homeowner wishes to pull some equity out to tie into a renewal, the home has far more equity than when the mortgage was started.
No one I know has a crystal ball, and during times of uncertainty, going with as much “certainty” as you can may be the best decision. I would recommend reaching out to a full-time, qualified mortgage broker and working with them to determine the best options that will give you a feeling of stability. Knowing you will have housing costs that will not be at risk of the economy, and if needed, some cash to use as a safety fund or to pay off bills will help to ease the stress we are all experiencing. This pandemic is giving us all a “stress test.” There is little reason to add more to the mix.
If you have any questions about mortgages, or if you see a real estate emergency on the horizon I can be reached at email@example.com.
Keller Williams Brokerage Inc