Mortgage Rate Decision

[SW20 MR2]

Our mortgage is up for renewal next month, and I'm trying to decide which mortgage term to go with. You can find a more detail on our financial situation in the thread below, but here are some of the updated happenings over the past few months:

http://canadianmoneyforum.com/showth...ancial-Journal

Expected mortgage balance at end of current mortgage - $110k (made $28k lump sum payment last month due to good bonus)
Current bi-weekly payment - $1100 (contributing extra $300 per payment)
Combined annual salaries - $147k (bonus between us this year was $34k, but average several years before that was $25k)

I've currently got 2 mortgage offers on the table:

3-year fixed @ 2.69%
4-year fixed @ 2.84%

Both mortgages allow up to 10% annual lump sum payments and double up payments anytime.

Using an online mortgage amortization calculator, I ran a few scenarios:

Option 1: 4 years @ 2.84%, 4 year amort - $1119 bi-weekly, mortgage paid off at end of term, $6384 interest paid during term
Option 2: 3 years @ 2.69%, 3 year amort - $1468 bi-weekly, mortgage paid off at end of term, $4527 interest paid during term
Option 3: 3 years @ 2.69%, 4 year amort - $1116 bi-weekly, $28612 at balance, $5644 interest paid during term

Here's my assessment of each option. Please correct me if I'm wrong or looking at it incorrectly:

Option 1 - Good safe schedule that more or less keeps us going on the same thing that we've done over the past 5 years. The downside to this option is the higher interest rate. Ability to make lump sum payments is minimized because of the 10% limit (max $11k per year), and the plan is to use our annual bonuses to make these payments.

Option 2 - The extra $350 bi-weekly is do-able, but a stretch. I'd rather not go this route in case something happens. Also, we may have another kid over the next year, and the loss of my wife's income would hurt more under this schedule.

Option 3 - Good compromise solution. Lower interest rate and same payment amount. I can make $11k lump sum payments each year and then pay off whatever balance at the end of the term. The downside is, if for whatever reason we can't make lump sum payments and need another mortgage term after this one, rates may be higher. But with $28k to go, interest shouldn't be too bad even if rates rise.

Any feedback would be appreciated.

[Four Pillars]

I would go with the lower interest rate and pick an amortization that makes sense to you.

Even if you take 5 years to pay it off, you really have no worries from interest rate risk, so I don't see the point in getting a longer term with a higher interest rate.

[Homerhomer]

Agree, option 3. Why pay more than you need to, nobody knows where the years will be in three years, and with such a low mortgage balance you are not risking much by having it locked in for one year less.

[canadianbanks]

I see your option 1 as the safest one, but from what you posted it doesn't look that there is s big difference between the 3 scenarios risk-wise.

[Just a Guy]

Did you go in and talk to the bank, or was this just the options they sent you? If you haven't gone in I would, the deals are always better.

Next, on most mortgages you can change some of the terms on a part-time basis. For example, you can write your mortgage without the extra $350 bi-weekly, but then arrange to make that extra payment right from the start. If the situation changes, you can drop the extra payment without having to change the mortgage.

I did something like this in the past with amortization, my bank assumed I wanted 30 years on a rental, and wrote up all the papers that way. I only wanted 20 years originally, so my payments were just structured as if it was a 20 year amortization (actually 20 year bi-weekly rapid). If something happened however, I could revert the payments back to 30 years if I needed.

It may also be worthwhile to ask for all the rates for 1-10 years...sometimes you find the bank has a weird "sale" on a rate you didn't think about. I've picked up 7 year rates that have been lower than 5 in the past. WIth interest rates set to rise, it may not hurt to be stable longer term.

[MoneyGal]

My only comment is that make sure you used a Canadian mortgage calculator, as interest on US-based mortgage calculators is handled differently.

[SW20 MR2]

So in going thru this whole process, I learned a lot about it.

I previously didn't know that there were different mortgage types: collateral charge and standard charge. The lender with the lower 3-year rate was a collateral charge, so it would have cost me $600 to pay a lawyer to register the new mortgage. They also didn't want to pay my old lender's discharge fee. This would've wiped out any of the savings that I would've gotten from the lower rate. I ended up going with the slightly higher rate with the 4-year term, but it is a straight transfer that will be handled by the new lender's lawyers. They're paying the majority of my discharge fee, so it's worth the move.