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Originally posted by rajivjuthani

Hello,

WIth the significant lowering of interest rates a lot of us would be looking to refinance.

What options do persons who have a fixed rate mortgage for eg locked for 5 years have.?

We have to pay a penalty to break the mortgage. My mortgage is at 4.9% fixed and I can get a variable rate of say for eg 4%. DO WE EXPECT THESE LOW RATES TO LAST FOR MORE THAN A YEAR ?

At the differential we can expect to recoup the costs of breaking the mortgage in a year and it would make sense if we can expect the benefit to be there for more than a year. Do we expect these low rates to last more than a year.

What is the CD's advice on breaking a mortgage especially Pramodji I ask what should be our approch to try and save money on interest costs.

Thanks,
Rajiv

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Rajiv,


You are right in saying that with these low variable interest rates most would be tempted to do either refinance or equity take out for the purpose of debt consolidation, renovation and upgrade or for investment etc. However, each case is different and one should discuss ones situation with a professional and consider all pros and con of breaking the present mortgage and paying penalties in order to take the benefits of low variable rate mortgages.

You have a very good fix rate at 4.9% and you should be sleeping peacefully at night not thinking about the fluctuations in mortgage payments with every move in variable rate. The present 5 year fix rate is around 5.35 which is much higher than the rate you have and hence if you break the mortgage you might have to pay only 3 months simple interest. In some body else's case whose interest rate is much higher then the penalty could be significant if the bank charges interest rate differential. But then again may be depending on his/her situation breaking mortgage could be beneficial.

In your case, supposing you break this mortgage and take a variable rate of 4% and assuming the rate remains same at least for 1 year, you would take more than 1 year (approx 15 months) to break even with the penalty you might have to pay. Since no body, not even the Governor of Bank of Canada can predict how the variable rates would behave in the next 15 months, it might turn out to be a bad move on your part if you are only doing it for the purpose of changing your mortgage from fix rate to variable rate.

Having said that, it might make sense for you to do it if you have high interest debts or are thinking of doing some investments or buying a rental property depending on the amount of equity you have in your present home.

Any body who needs a suggestion can pm me with his or her situation like mortgage amount, rate of interest, time remaining in the mortgage, any debts with higher rates, and income etc. and I can advice right course of action.