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Should I renew mortgage early to lock in today’s lower interest rates

renew earlyDear Ross, I have a $234,000 mortgage with Royal Bank which matures in September, 2014. The interest rate is 3.85%. Should I break it now and lock in five years at 2.99%, or even ten years at 3.89% (or less)? Thanks, K.E., Mississauga

Hi Kathy, you would consider breaking your mortgage for the following reasons:

  • You would be pleased to guarantee yourself a terrific, fixed interest rate for the next five or ten years.
  • You are concerned that if you wait till September 2014, rates available at that time might be higher than what you can get now. It would have been worth it to break the current mortgage now, for the insurance of a great rate for years to come.
  • If you can do a cost/benefit analysis and decide that breaking now has upside, and no perceived downside for you.

Let’s first look at the cost of breaking your mortgage now. If you stay with RBC, they may waive a prepayment penalty (really important to find out) and allow you to ‘blend and extend’ your existing mortgage rate with the new one. For example, using their best available rates at RBC, blending with a five year rate of 3.29% would give you a blended rate of 3.48% for the next sixty months – till February 2018.

And if you blended with their ten year mortgage of 3.99%; you would have a blended rate of 3.97% for the next ten years – till February 2023. Both these blending calculations are estimates; RBC will give you their numbers, which are what really count..

If you elect to leave RBC, you would have to pay a mortgage discharge fee (usually $250 to $300). As long as you don’t alter the other terms of your mortgage, it should be categorized as a ‘switch’ and you can avoid legal and appraisal fees.. BUT you would have to pay a prepayment penalty of the greater of three months interest or IRD. (interest rate differential)

The major banks are notorious for having punitive IRD calculation methods. I plugged your mortgage into a terrific calculator at Rob McLister’s website  Canadian Mortgage Trends  and saw the penalty might be around $2,250 if three months interest were used, but could be over $8,500 otherwise.

RBC can give you the actual IRD amount very quickly over the phone – no two lenders use the same approach, which is why there is a great deal of controversy over this thing called IRD. I don’t think you can complete this analysis without knowing your actual number, as it can really mess up your plans.

It seems same safe to say that if you wish to break your RBC mortgage early, your best chance would be with RBC, but only if the prepayment penalty were very low, or in fact waived.

Now let’s look at the scenario for long term interest rates, and how this factors into your decision. Here are a couple of links to related articles. Ten year mortgages are cool these days and How low can rates go?

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No one can predict with certainty where rates will be at any particular point in the future (beyond say next month) But we can look at historical and empirical date and tell you that the long term rates on offer now are as good as they have EVER been.

So personally, I like the idea of grabbing them if it is at little cost to yourself. If I were assessing this option, I’d give serious thought to going with ten years. You pay a small “premium” for the assurance that no matter where rates go in five years, you still have a truly fine interest rate for the ensuing five years. In fact Scotiabank just announced a ten year rate of only 3.69%, which is truly spectacular.

A good mortgage agent can probably  get lower rates than RBC will likely offer you, but for this approach to make sense, the additional costs of leaving RBC will need to be factored in. My gut tells me RBC will be the cheaper long term choice, but get me the numbers Kathy, and I will tell you for sure.

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Ross Taylor is a full-time mortgage agent and credit specialist who blogs frequently at ASKROSS

If you have any questions about anything financial, please contact Ross, he answers everyone personally.