Should I Refinance for a Lower Rate?

It’s time to revisit your mortgage strategy.

Mortgage rates are down, both on the fixed and variable sides. It’s all over social media and the news. We are witnessing rates below 2% and those individuals whose rates are above 2% or even 3% are wondering whether they could or should do something to take advantage of historically low rates.

If you are sitting in a variable rate, your rate would have already gone down when the Prime rate got lowered a few months ago so you would have experienced lower payments on your mortgage. That said, there is a possibility that you can do even better. If your variable rate is near Prime, for example Prime – 0.3%, – 0.2% or even higher, it probably makes sense to pay the penalty and take advantage of current variable offers around Prime – 0.8% or so.

A variable mortgage typically has a guaranteed penalty of 3 months worth of interest, so the cost of breaking your variable mortgage may be minimal, compared to significantly higher savings that the current variable rate offers.

It’s definitely worth the analysis…

Things get a bit more complicated if you are in a fixed mortgage rate as the penalty could be 3 months interest, in the best case scenario, or Interest Rate Differential (IRD), which could be much higher.

While the concept of IRD calculation is beyond this article’s scope, the penalty for breaking a fixed rate mortgage will typically vary from mortgage to mortgage, depending on your remaining term, your original mortgage’s discount and the rates that your current lender offers. In other words, it’s different for everyone. That said, the very first step to determine if it’s worth breaking your existing mortgage, in order to getting a lower rate, is to find out what your penalty is. We would then compare the penalty to the savings of a lower rate and figure out whether it’s worth doing it or not.

On another hand, our decision on whether to refinance or not is very often driven by factors that cannot be defined or supported by a detailed mathematical analysis. Improved cash flow, access to equity, lifestyle change and peace of mind are only a few of them.

Since the outbreak of the Covid-19 pandemic, our homes have become one of the primary enablers of our other personal and financial goals. We’ve realized that we can source the equity in our city home to buy that dream cottage getaway. The pandemic has given us the time and peace needed to reflect on what we really value and want out of life. And those of us who are home owners know that our real estate investment can be sourced to achieve those life goals.

Restructuring of your mortgage through refinancing could not only give you access to lower mortgage rates. It could improve your cash flow by lowering your mortgage payments, at least until things go back to normal. It could also, where applicable, give you access to equity needed to purchase that cottage property you have in sight… or equity for peace of mind, should you ever need it.

Whatever the case, it’s worth looking into it. We’re all different so there is no one-size-fits-all solution.

Let’s figure out what your needs are!

Photo by Paul Kapischka on Unsplash