# Early renewal of mortgage?



## brad (May 22, 2009)

We have our mortgage with ING; it's a 15-year mortgage, our first term was 5 years at a fixed rate of 5.2%. We're not up for renewal for another two years, but today I got an email from ING inviting me to renew early at a fixed rate of 3.89% for five years.

Does this seem like a good idea? Personally I would prefer a variable-rate mortgage but my common-law wife would prefer the stability of a fixed rate even if it means we pay more, so I'm pretty much stuck with that.

Clearly the lower interest rate is attractive and would save us some money, but I'm not sure if there's some sort of catch I should know about with an early renewal?


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## MoneyGal (Apr 24, 2009)

Here's the catch:

if you stick with your current mortgage, you are free of your contract with ING in two years.​
If you accept the new mortgage, they've got you for another 3 years beyond those two.​
That's all there is to it from ING's point of view.


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## OhGreatGuru (May 24, 2009)

It sounds like a good deal, unless they are hiding the normal Interest Penalty by rolling it into the mortgage amount. Just check the fine print.


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## brad (May 22, 2009)

Thanks for your responses -- I'll look into the interest penalty issue, that's a good point. 

As for the catch, I figured as much...I was puzzling over why they would offer an early renewal and then realized that it's just because they want to ensure that they keep me (or more precisely the interest I'm paying) for at least another five years. I'm willing to go along with that game, as our experience with ING has been very good so far.


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## Sampson (Apr 3, 2009)

Depending on where you think interest rates will be in 2 years you may still consider breaking your contract.

CIBC is now offering (again) a cash-back @ 3.95%. (as per http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/03/banks-wage-war.html)

The cash back should cover your penalty (or close to it), then you can lock into 3.95% for another 5 years if this is the direction you want to take.


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## MoneyGal (Apr 24, 2009)

Keep in mind you will owe all that cash back to the lender if you break that mortgage before the term is up.


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## brad (May 22, 2009)

They do charge an interest penalty so I have to factor that into the equation.

Here's the fine print in their email:



ING Direct said:


> Locking in at today's low rates could lower your payments. For example, a 1% mortgage rate reduction could result in a savings of over $100 every month†.
> 
> † Compares mortgage payments for an initial mortgage of $225,000 with monthly payments based on a 5 year fixed rate of 4.89%, amortized over 25 years to a mortgage renewed 2 years early with a remaining balance of $210,042 (*includes $3,870 in interest penalties*) with monthly payments based on today's 5 year fixed rate of 3.89%, amortized over 22 years.


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## Dana (Nov 17, 2009)

It sounds like ING has adopted the same retention strategy as cell phone providers -they offer you an upgrade part way through your contract as long as you agree to extend the contract. As long as you are happy keeping your business with them and there are no surprise penalties if you break the contract before the end of the new term, it sounds good.


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## cardhu (May 26, 2009)

Brad ... If you took the early renewal, would you ...

(a) maintain your payment amount as it is now? or 
(b) enjoy the lower payments that go along with the lower rate?

The IRD penalty is not really a surprise ... you can’t really expect ING to just drop the rate, out of the blue, with nothing in exchange ... having someone “on the hook” for an extra 3 years is not enough to justify that sort of decision ... but its not necessarily a deal-killer ... the example ING uses results in no benefit whatsoever in the first 24 months of the early-renewal term (a.k.a. the last 24 months of the original term) ... essentially, if you hold cash flow identical in both cases, your mortgage balance at the end of 60 months will be the same either way ... the only difference at that point would be that in the status quo case, you are not tied into anything, and in the early renewal case, you are tied in to the 3.89 rate for a remaining 3 years. 

Essentially it’s a bet as to whether you think you can do better than ~3.9% on a 3 year term when you renew in 2 years.


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## brad (May 22, 2009)

Dana said:


> As long as you are happy keeping your business with them and there are no surprise penalties if you break the contract before the end of the new term, it sounds good.


Yep, I'm happy keeping my business with them, especially because they allow you to pay up to 20% of the original mortgage amount in additional payments each year without penalty. We've never been able to achieve that percentage but it's good to know it's an option and we like the flexibility.

I just have to figure out what our penalty will be for early renewal, and do the math to see to what extent we come out ahead.

Of course it's a gamble because nobody knows where interest rates will be in two years when our current term is up. I kind of doubt they'd be much lower than they are now, though.


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## brad (May 22, 2009)

cardhu said:


> Brad ... If you took the early renewal, would you ...
> 
> (a) maintain your payment amount as it is now? or
> (b) enjoy the lower payments that go along with the lower rate?.


Definitely option a.

We are trying to pay off our house as quickly as possible, and are already on an accelerated bimonthly payment plan. We're already on track to have this 15-year mortgage paid off in 10 years.


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## andrewf (Mar 1, 2010)

I did some back of the envelope figuring on their proposal (it's inexact), but it seems like the $3870 penalty, if you treat it as additional interest over the next three years works out to an incremental 0.65% change on the 3.89% they quote you. It seems to me like they are splitting the difference between your current rate and what the market rate is now, which seems fair enough to me. I think I would go for it.


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## OhGreatGuru (May 24, 2009)

_...it seems like the $3870 penalty, if you treat it as additional interest over the next three years works..._ 
I don't know about that. That $3870 is being added to the capital on the mortgage. The way mortgage payments work he'll be paying interest on that $3780 for 22 years.


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## brad (May 22, 2009)

OhGreatGuru said:


> I don't know about that. That $3870 is being added to the capital on the mortgage. The way mortgage payments work he'll be paying interest on that $3780 for 22 years.


Well, don't forget this is a 15 year mortgage, not a 30-year mortgage, and I intend to have the whole thing paid off in less than 10 years anyway.


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## MoneyGal (Apr 24, 2009)

I concur with OGG. This isn't a bad back-of-the-envelope way to think about the differential, but it isn't how mortgages actually work. 

When you add to the total mortgage amount, the new interest rate is now calculated on that re-set amount. The Office of Consumer Affairs (part of Industry Canada) has a "keep or break?" mortgage calculator that may be helpful here.


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## Sampson (Apr 3, 2009)

Brad,

I made a guest post on MDJ a while back tackling the same question. I included an excel spreadsheet to help you work through exact numbers.

Have a gander and feel free the PM me if you have questions.

In our case, it made big sense, we'll be saving over $16k over our term (after the payout penalty etc), even though our penalty was substantial (we were only a 1 and a little bit into the mortgage.


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## brad (May 22, 2009)

Sampson said:


> I made a guest post on MDJ a while back tackling the same question. I included an excel spreadsheet to help you work through exact numbers.


Thanks -- I found it at http://www.milliondollarjourney.com/should-you-break-your-mortgage-for-a-lower-rate.htm

(It took me a few minutes to realize that "MDJ" stands for Million Dollar Journey, but I figured it out!).

I'll give ING a call and find out what the penalty is, then use this calculator to see where I come out.


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## cardhu (May 26, 2009)

brad said:


> I just have to figure out what our penalty will be for early renewal, and do the math to see to what extent we come out ahead.


The decision you’re faced with is not one that can be solved by math ... it is a bet, pure and simple ... you’ll come out ahead if you win the bet, and you’ll come out behind if you lose the bet ... the question is whether you think you can do better than ~3.9% on a 3 year term when you renew in 2 years....

Based on the “fine print” you quoted upthread, ING’s penalty structure appears to be very straightforward ... the penalty will be whatever amount negates ALL the benefit of the lower interest rate between the date of your early renewal, and the original term expiry ... you can estimate this penalty amount by the following process ... 


Set up a side by side comparison of two mortgages. 
Let the first mortgage represent the remainder of your current term ... set the initial balance for this one to your current mortgage balance ... peg the rate at your current rate ... assume the basic payment schedule only (ie. no prepayments) for the remainder of the term ... take note of the mortgage balance at the end of term. 
Let the second mortgage represent the early-renewal option ... set the initial balance for this one to your current mortgage balance *plus IRD* ... set IRD to zero, for now ... peg the rate at the early-renewal rate ... set payment schedule identical to step 2 ... note the mortgage balance at the equivalent point in time when your existing term would have ended. 
Note the difference between the ending mortgage balances in each of steps 2 and 3 ... solve for IRD by forcing this difference to zero ... in other words, change the IRD value until the ending mortgage balances are the same. Excel can do all this in a flash if you are familiar with the “goal seek” function.
This works ... your shortened amortization has no impact on it ... (but prepayments would, so leave them out of the exercise). 

When you reach what would have been the end of the current term, your mortgage balance owing will be the same either way ... the only difference being that with early renewal you will be tied in to 3 more years at 3.89% , while with status quo, you’ll be able to (or will have to) take whatever rates are available at that time ... 

Do you feel lucky?


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## brad (May 22, 2009)

cardhu said:


> The decision you’re faced with is not one that can be solved by math ... it is a bet, pure and simple ... you’ll come out ahead if you win the bet, and you’ll come out behind if you lose the bet ... the question is whether you think you can do better than ~3.9% on a 3 year term when you renew in 2 years....


Thanks for that detailed and clear explanation; I get it. Normally I would assume that interest rates would climb over the next two years as the recession eases, but signals are very mixed on that front and it seems it could go either way. 

At this point I'm inclined to stick with the status quo and see what my options are in 2 years. ING is likely to still have the best rates, or close enough to it that we'll want to stick with them. We'll continue to shovel money into prepayments (we try for $15-20K in extra payments each year), so when it's time to renew we'll have a smaller amount remaining on the loan. 

If in 2 years interest rates are at 6 percent I'll kick myself for this decision, but it seems the odds are just as good that they'll stay low for the next few years. And it really is a bet, so as with any other bet I'll just make my decision and live with the consequences.


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## Shayne (Apr 3, 2009)

Do the math and if you do it properly I am guessing you will leave Ing for a lender who will give you 3.69% And why not, Ing is asking you to pay the penalty anyhow.


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## MoneyGal (Apr 24, 2009)

Coming back to this thread to ask for some input on my personal situation. 

I locked into a mortgage about 2 years ago for the first time EVER (I have always had six-month open mortgages up 'til now, in 16 years of home ownership) because I wanted stability, at that time, more than I wanted flexibility. 

Of course, when I look at today's rates, I feel like I want to migrate back to my "natural" stance of open six-month mortgages. (And I really mean TODAY's rates; I am clear that rates are on the way up.) 

I know what my IRD is. I also, recently, calculated the distribution of historic mortgage returns (for a project at work). I can figure the "math" part of this out no probs. 

All that said - I don't know how to approach this decision. I think Carhu's explanation is bang-on: I know this is a gamble. And when I think about the question of "do I feel lucky?" - that doesn't get me closer to a decision. Except I'm not crazy about where I am now. I don't like continuing to pay the rate I am paying. 

Thoughts? Advice? I'd appreciate perspectives from others on how you approach this kind of decision.


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## Berubeland (Sep 6, 2009)

This entire discussion is about risk and risk management.

In a mortgage with a fixed rate the bank assumes any risk that rates will change. They charge a premium for taking on that risk.

In a mortgage with a variable rate you assume that risk and save the premium.

It depends on your situation. Are you able and comfortable assuming that risk? Or are you happy to pay the premium because any raise in the rates will cause stress or problems?


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## MoneyGal (Apr 24, 2009)

Berube: of course. You are right. Thanks for the input. 

It's interesting, I was just discussing the other day with a colleague at work that mortgages (from the lender's POV) are actually quite complicated instruments - but they are not perceived that way. 

I think I'm ready to be back in the land of the risky. It is driving me too nuts not to be.


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## MoneyGal (Apr 24, 2009)

Rob Carrick had an article in this morning's Globe and Mail on breaking your mortgage...I still haven't made any progress in breaking my own.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> Rob Carrick had an article in this morning's Globe and Mail on breaking your mortgage...I still haven't made any progress in breaking my own.


I gave it some serious consideration but with the breakage fee I just couldn't see how it was worth it.

I did move part of it to my HELOC (half the interest) and we pay quite a bit down each year ($20k last year) so I don't think it is worthwhile for moi.


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