News from Canada's Mortgage Experts
Category: Refinancing Your Property
Wednesday, June 13, 2012
Posted by: The Mysterious Monster
Recently, MonsterMortgage.ca was approached by a lifelong customer of a big bank referred to MonsterMortgage.ca by a friend.
I want to share with you a great example of why we always encourage clients to be loyal to themselves first and not their bank. I was contacted from a long-time bank customer (her name is Lucy) who received some advice from her bank and was contacting MonsterMortgage.ca to seek out a second opinion. Basically she was looking to verify what it was her bank was advising her to do with her mortgage. Let me first set up Lucy’s mortgage scenario:
Lucy is carrying a 3.9% 5 year fixed mortgage and was looking to switch to a mortgage with a lower interest rate. Her bank had suggested that Lucy break her mortgage and enter into a short-term mortgage, but with the penalty and the length remaining on her term, it just didn't make sense.
Lucy has a busy family and is very passionate about her work, so she advised us that it was hard to reach her live so she preferred that we communicate with her via email. Below is a summary of the email exchange between her and I, the advice it is relevant to many people in today’s mortgage market:
Thanks for the information and of course taking the time to contact MonsterMortgage.ca. It is safe to say that the penalty and legal costs (combined over $5,000) to switch your mortgage will not make sense from a cost/benefit perspective.
I strongly suggest holding off on peeling back 15% of your mortgage balance with a lump sum payment and avoid locking into a one or two year mortgage term as suggested by the customer service representative at your bank.
Firstly, based on your mortgage balance, the 15% lump sum payment will not provide sufficient savings.
Secondly, you will never be able to match up your maturity dates as each term will expire on a different day than that of your current mortgage term.
The strategy your bank is suggesting only works if you can match up the maturity dates of both distinct terms. Otherwise, you will never be able to leave at maturity because your other term will trigger a penalty - which is really only in the bank's interest because it makes the money NOT you.
The current five year fixed rate is 3.19% and the 10 year is 3.89% thus a savings can only be had on the variance between your current rate and the five year term for 22 months on an approximate balance of $139,000....this savings is approximately $1,800 and does not outweigh the cost to break your mortgage at this time.
Don't feel blue about your current 3.89% rate - it's fair and still low relatively speaking. Your bi-weekly payment is on an accelerated repayment and your amortization is being reduced aggressively. I would suggest increasing your payments by $25 to $50 when you are comfortable doing so and continue your way to a zero balance. With just over ten years to go, periodic payment increases like the one suggested will shave off a year or two depending on the amount increased.
Your line of credit gives you a great amount of comfort considering your self- employed status. The balance of $11,000 is manageable and well within a comfortable level relative to its $130,000 limit.
At the end of the day, you are in good shape and incurring any type of costs to restructure your mortgage at this time is not necessary. I hope this check up and assessment is helpful. If you have any further questions, please feel free to let me know and I would be happy to help at any time.
As you can see Lucy's bank has provided advice to her that would end up costing her money and would have lined their pockets. It cannot be stressed enough when it comes to your mortgage - be loyal to yourself first and get trusted advice before lining your bank’s pockets with even greater profits.