It should come as no surprise that roughly six out of ten homeowners with the standard five-year fixed rate mortgage break their terms within three years. And brokers have heard all of the reasons. Some are good and some are less fortunate. There are those who want to leverage recent large increases in property value for investment terms, or they want to get some equity out of their home to do some renovations. In other cases, it can be life events like divorce, new relationship, the kids going off to college, or just paying down credit card or consumer debt.
In fact, if you’re reading this and have had a mortgage long enough, one of the things listed above has probably come into your life. But they all come at a cost. If you’re a fixed-rate person, it’s important to understand how your lender is going to calculate the penalty when you break the mortgage.
Big banks calculate penalties based on the discount they gave you off of their posted rates at the time you first got your mortgage. They take their new posted rate for the amount of time you have left in your mortgage (3-years, 4-years etc.), apply the same discount they first gave you and then calculate how much interest they would lose as the difference between the two for the rest of the term calculated on your current balance. That is your penalty and it can be quite hefty.
But other lenders like credit unions and monolines will use the interest rate
differential or three month interest penalty.
There are a few points to consider before refinancing:
• You can tap into 80 per cent of the value of your home
• You cannot qualify for default insurance which can limit your lender choice
• You would have to re-qualify under the current rates and rules
You could sign a fixed rate for a shorter term, like three years. That just obviously shortens the length of the mortgage. Or you can also consider a variable rate since the penalties to break the term are much lower. While it may be tempting to just stick with the big banks, you’ll want to talk to a mortgage broker first. Mortgage brokers have access to all kinds of lenders from credit unions to monolines (a monoline is considered a company specializing in a single type of financial service, like a mortgage, and do not have brick-and-mortar branches) which can arrange better terms if you do need to cut your mortgage early.