Existing Mortgages: to break or not to break, that is the question

You have seen lower mortgage rates for the last few months. And, you have been talking about terminating the current mortgage term. Is it the right thing to do?

Recently, we have received numerous phone calls to seek advice as to whether early mortgage renewals or transfers are beneficial to borrowers. Here are a few thoughts to consider:

1. Know Your Mortgage

Many of us may not fully understand the term and other particulars on our largest debts in

life. You need to understand (1) time left on your mortgage term; (2) the interest rate; (3) remaining balance; and (4) whether there is a breakup cost.

Some borrowers have left this important job to their banks and trust that their bank should give them a fair rate and the best option that suits the borrowers.

2. Reasons to Change

The only constant in life is change. You may need to change your mortgage when you move to a new house, borrow more money to finance your business or simply lower your mortgage payments. Under the current economic situation (i.e., recession), interest rates are low. For those who had arranged their mortgages a few years ago, there may exist an excellent opportunity to save money by changing an existing mortgage.

3. Right Approach: Total Costs

Carrying a mortgage is a tremendous commitment (and responsibility) in one's financial affairs since it is usually the largest debt in life. That's why one needs to know the total costs of obtaining or changing a mortgage.

Total costs of having a mortgage include interest payable during the mortgage term, legal fee, discharge fee and broker fee if applicable. There is usually a fee payable to the mortgage lender if you break your mortgage term/contract before its maturity (i.e., penalty).

4. "To Break or not to Break, that is the Question."

It requires accurate information to make your decision on whether to break your current mortgage contract or not. "Total Costs" approach is the right one. First, you need to understand your current mortgage rate and the new interest rate to ensure that you pay less interest on the new mortgage [existing interest minus new interest]. Secondly, you need to know the penalty you will have to pay [minus penalty]. You may call your lender to get this. Finally, you need to know if you pay any other fees such as discharge fee, legal fee, appraisal fee and broker fee [minus fees].

To conclude, if your result (i.e., existing interest minus new interest minus penalty minus fees) is positive and significant, it is time to break the mortgage contract. A rule of thumb is this: you may consider breaking your mortgage if there is 1% difference between your existing mortgage rate and the new rate offered.

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However, costs may not be the only factor to consider. You may also consider non-monetary aspects such as convenience of banking, existing banking relationship or flexibility of using credit. At the end of the day, it is your responsibility to save and manage your money wisely, not the bank's!

By Martin Shao, President, Valueland Mortgages. Copyright.