# Mortgage renew with 6000$ penalty ? or wait out 1 year?



## Eaglyeye (Mar 21, 2017)

My mortgage is up for renewal - Sep 2018 , i am currently on a 5-yr fixed- 3.59% term with RBC. To my bad luck just when i had signed this within few months rates started to go down and now when its time to renew next year it will go up (it already started) . I am thinking of breaking my term and looking into getting another 5-yr fixed before end of this year so as to avoid paying higher rates come sep 2018 . I wanted to know if this is even worth doing ? 

The bank will be charging me( IRD formula )- 6500$ to break the mortgage early. Wonder if i bring my mortgage to a different BIG bank , they can help me lower this penalty ?

Current amount owing - 300K
Current rate - 3.59%- RBC
Renewal date- Sep 2018
Current value of house (primary and the only residence)- 650K 
Prepayment penalty to break mortgage- 6500$


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## OnlyMyOpinion (Sep 1, 2013)

Are you planning to pay it down or just renew? If paying it down, I'd just leave till next Sept and apply the money you saved by not changing. If you're not planning to pay down you should consider it if at all possible. Particularly if this is 'home' and you plan to stay in this house.


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## Mortgage u/w (Feb 6, 2014)

Just looking at your numbers quickly, I don't think its worth paying the penalty. The penalty is relatively high and if you consider changing institution, there are legal fees you need to consider as well. 

The calculation you need to do is simple. Determine the interest you will pay between now and Sept 2018 with the current rate. Then calculate with the new rate. For it to be worth it, you will need to recuperate the penalty payment (and legal fees) with the difference in interest. Then, of course, you will need to speculate on the future in rates, which is never a good idea to do.

I'll repeat again why long-term fixed-rates are not ideal. Had you taken a variable rate back then, I am sure you would have been better off. At least, you would have had the benefit of locking in a fixed rate with no penalty plus a substantial savings over the years since the rate would have been lower than 3.59%. 

Banks have really bad penalty calculators. If you must stay with them, choosing a variable rate is wiser since the penalty is a standard 3 mth interest.


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## STech (Jun 7, 2016)

Yup, what OMO said. Also the house's current value has no influence on this decision at all.

Consider whether you want to go a variable rate vs fixed, if your risk profile and finances allow. I saved a bundle when I had a mortgage, by going with a variable rate mortgage. Also $6500 is a big chunk of change to break a mortgage. Are you making accelerated weekly payments? Taking advantage of all prepayment privileges? Those can make a significant dent in your mortgage in the long haul.


Edit: Mortgage u/w just beat me to it, but I agree with his notion as well. Consider the variable angle seriously. Do the math, and be very certain you can handle a 1, 2, or 3 percent increase in rates. More than likely, a variable rate will win, but nothing is ever guaranteed.


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## Eaglyeye (Mar 21, 2017)

Thank you for the inputs.

@ OMO- I am just looking to renew , i am 30 yrs old now and do not have that kind of money at the moment. Looking at least 10-15+ yrs till i can pay-off . But yes would had waited if that was my plan. 

@Mortgage u/w & Stech- yes i do know about variable rates but this was my first house and at the time i was very naive and didnt do my home-work before signing onto this. As i was told that 5yr fixed is better option for new buyers , if you are not comfortable with changing payments every few months then stick with fixed terms. 

As per RBC's online calculators my break even rate was around 1.49 if i were to break the mortgage today. But i was more thinking about the future that is after sep 2018, i know its not good to speculate but given the current trend the rates are going up already no ? with another hike expected before end of year. 

How much legal fees add upto ? Cant we bargain with the new bank to cover the legal fees ?


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## twa2w (Mar 5, 2016)

Ask the RBC if they can do a blend and extend of the rate/term. You will have to talk to a more experienced banker to get this done. While not officially offered anymore IIRC, the bank may do some version of this.
Essentially you have 1 year left at 3.59%. Lets say the current rate for a five year term, if you were to renew today, is 2.4%.
The bank does a caculation of the amount of money you would pay in interest for one year at your current rate, then calculates the interest at the new rate for 4 years based on your declining balance. The total of these two figures is added and then your average rate is calculated. Depending on the outstanding balance your interest rate might work out to 2.8715 as a example. Your mortgage is then renewed for 5 years and payment set based on this rate.
I would suggest you keep your payment the same as you pay now.
If the bank won't do this, and they may not, I would suggest you keep an eye on rates and every month ask your penalty. The IRD will decrease over time and as rates increase. You may find that in, say Dec or Jan, the penalty drops enough to make it palatable. 
If neither of those work, the other thing I would suggest is to check with RBC 120 and 90 days prior to renewal next year. Big banks will often offer to renew mortgages 3-4 months early without penalty to get their clients locked in again. This could save you a bit if there a rate increase next spring or summer.


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## Mortgage u/w (Feb 6, 2014)

Eaglyeye said:


> As per RBC's online calculators my break even rate was around 1.49 if i were to break the mortgage today. But i was more thinking about the future that is after sep 2018, i know its not good to speculate but given the current trend the rates are going up already no ? with another hike expected before end of year.
> 
> How much legal fees add up to ? Cant we bargain with the new bank to cover the legal fees ?


Just like its not a good idea to time the stock market, you should't time mortgage rates either. You will get hit by a rate hike no mater what - you may avoid one during your term but the hike will get you at renewal. The variable rate, on the other hand, will carry a lower rate from the get-go and will benefit when the rates drop. So if you are looking for savings, its easier to select a variable rate rather than time the market.

As for legal fees, a ballpark figure is $1000 and yes, some lenders offer incentives. But again, I don't think you will be able to recover your costs. 

As twa2w mentioned, you can always consider a blend rate but all you are doing is prolonging a locked in term which will be similar to what you are currently paying.


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## Eaglyeye (Mar 21, 2017)

twa2w said:


> Ask the RBC if they can do a blend and extend of the rate/term. You will have to talk to a more experienced banker to get this done. While not officially offered anymore IIRC, the bank may do some version of this.
> Essentially you have 1 year left at 3.59%. Lets say the current rate for a five year term, if you were to renew today, is 2.4%.
> The bank does a caculation of the amount of money you would pay in interest for one year at your current rate, then calculates the interest at the new rate for 4 years based on your declining balance. The total of these two figures is added and then your average rate is calculated. Depending on the outstanding balance your interest rate might work out to 2.8715 as a example. Your mortgage is then renewed for 5 years and payment set based on this rate.
> I would suggest you keep your payment the same as you pay now.
> ...


I did call them and as suggested the RBC rep i talked had not much knowledge of what i was trying to get (blend rate)  , he suggested me to go talk to someone at a branch although he also advised me to stick with what i have and try calling in for a early renewal come January .


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## Eaglyeye (Mar 21, 2017)

Mortgage u/w said:


> Just like its not a good idea to time the stock market, you should't time mortgage rates either. You will get hit by a rate hike no mater what - you may avoid one during your term but the hike will get you at renewal. The variable rate, on the other hand, will carry a lower rate from the get-go and will benefit when the rates drop. So if you are looking for savings, its easier to select a variable rate rather than time the market.
> 
> As for legal fees, a ballpark figure is $1000 and yes, some lenders offer incentives. But again, I don't think you will be able to recover your costs.
> 
> As twa2w mentioned, you can always consider a blend rate but all you are doing is prolonging a locked in term which will be similar to what you are currently paying.


That is true although if you do look at the trend it does suggest that the rates will go up . More probability is going up then down . Not sure how can/will i get hit if i am locked in for 5 yrs ? If i do signup for a 5yr fix (~2.99%) here until 2023 and the rates start to go up next year wont i be safe with a fixed term rather then variable ?


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## trieudu (Sep 7, 2017)

In my opinion i think that you should wait for 1 year more.


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## Eaglyeye (Mar 21, 2017)

A agent just got back to me with 2.79% 5-yr fixed rate . Although i will have to take care of the legal feed (~1000) and the prepayment penalty (~6500) all by myself .


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## Mortgage u/w (Feb 6, 2014)

Eaglyeye said:


> That is true although if you do look at the trend it does suggest that the rates will go up . More probability is going up then down . Not sure how can/will i get hit if i am locked in for 5 yrs ? If i do signup for a 5yr fix (~2.99%) here until 2023 and the rates start to go up next year wont i be safe with a fixed term rather then variable ?


Again, you're timing the market and speculating on the future of mortgage rates. Let me tell you a story..... 

10 years ago, mortgage rates broke through below the 5% mark and people rejoiced by quickly locking in their 4.85% and whoa, 4.65% rates! 

Then rates kept dropping and those who initially rejoiced started regretting their move. Rates broke below 4% and more excitement - more lock-ins. How much lower could it go?!? We must be at the bottom! Right? Wrong.

BMO makes headlines; "5 YEAR FIXED 2.99%" O......M......G!!!!! Right? Wrong again.

So in the past 10 years, I'll repeat, 10 YEARS, analyst over economist over fortune teller kept repeating, "rates can't go any lower....they only have one way to go. Up." 

And of course, rates kept dropping. More rejoicing. More remorse.

So does any of that sound familiar? Your 2.79% sounds great today and you may save yourself from a rate hike within your 5 year term. But are you expecting them to go back down when your term is up? Locking in another 5 year term is simply a guarantee that you will pay a higher rate and that you will also pay $6500 penalty and legal fees. If you continue your current term, you 100% save $6500+, and you have a 50% chance of paying a lower rate next year.

Don't let "fortune tellers" influence you.


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## Eaglyeye (Mar 21, 2017)

I have done a calculation based on my current situtation to check if its actually worth to pay a penalty at this time. As per that calculation it looks like i can save upto 2000-3000$ if i break the mortgage now. Let me know if the numbers i put in even makes sense . I have attached the images.


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## Eaglyeye (Mar 21, 2017)

Mortgage u/w said:


> Again, you're timing the market and speculating on the future of mortgage rates. Let me tell you a story.....
> 
> 10 years ago, mortgage rates broke through below the 5% mark and people rejoiced by quickly locking in their 4.85% and whoa, 4.65% rates!
> 
> ...


You are right but the rates back then were 5% which is already high and currently the rates are 2-3 % . Even if i break my mortgage and lock in a 5-yr term . I don't think the rates can go even lower ( i know i know not trying to predict but the odds are such ) look at what is happening .. Canadian economy is doing good, BOC is raising rates with more chances of raising again before end of year, skyrocketing real estate prices are getting a bit under control with the rates going a bit higher. I mean one just cant ignore these factors and say that the rates will start going down .


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## Mortgage u/w (Feb 6, 2014)

Eaglyeye said:


> View attachment 16290
> View attachment 16298
> 
> 
> I have done a calculation based on my current situtation to check if its actually worth to pay a penalty at this time. As per that calculation it looks like i can save upto 2000-3000$ if i break the mortgage now. Let me know if the numbers i put in even makes sense . I have attached the images.


The way I see it, you may be breaking even at the 4 or 5 year mark. You're total interest savings between 2.89% and 3.59% for a 5 year period is roughly $9000 in interest. Factor in your $6500+ penalty and legal fees, the savings as such is very minimal. Don't forget, you're calculating on a 5 year period but that is not realty. You have to do the calculation using your current remaining term. I can guarantee you that you will be at a loss.


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## Mortgage u/w (Feb 6, 2014)

Eaglyeye said:


> You are right but the rates back then were 5% which is already high and currently the rates are 2-3 % . Even if i break my mortgage and lock in a 5-yr term . I don't think the rates can go even lower ( i know i know not trying to predict but the odds are such ) look at what is happening .. Canadian economy is doing good, BOC is raising rates with more chances of raising again before end of year, skyrocketing real estate prices are getting a bit under control with the rates going a bit higher. I mean one just cant ignore these factors and say that the rates will start going down .


If you think 5% is considered high, you either forgot or have not lived long enough to see when rates were 20%.

5% is what I would consider a normal rate. Our current rates are abnormally low. I am not saying that they WILL go lower.....but I AM saying that you should not be tempted to lock-in a new rate at the expense of incurring a penalty, just because you're predicting we're at the bottom of the cycle. Heck, I predict the rates will go up too. But I still wouldn't break my term to lock in a perceptibly lower rate. I like to know that I am paying the lowest rate available - rather than pay a higher rate hoping to outsmart the market. Sort of reminds you of an insurance policy, doesn't it? And we all LOVE insurances, right?

If you want to truly save and _try _to "outsmart" the market, then you should be considering variable rates - not fixed.


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## gardner (Feb 13, 2014)

Mortgage u/w said:


> If you think 5% is considered high, you either forgot or have not lived long enough to see when rates were 20%.


I'm an old guy too and can't help thinking that the OP has a nice sort of problem to have, with rates so ridiculously low. And while I would hope the OP is financially capable of handling, say, 6% without setting his house at risk, it is still entirely legitimate to be seeking to make the best of the situation and eking out the last 1/10 percent.

I don't know what the terms of the OP's mortgage are, but you may have tools like lump-sum payments, accelerated payments or extra payments that could reduce the effective cost of the IRD. If you are entitled to pay down 10% you could do that, and thereby knock back the principle and effectively the penalty.


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## lonewolf :) (Sep 13, 2016)

Another strategy might be to hedge your position in the options or futures market perhaps with some out of money puts on TLT if play options. It is US market though if US rates go up our rates will most likely go up also.

This is the path I would take & put the rest of the 6500 dollar penalty on the mortgage. 

I also would not put any money into RRSPs or TFSA instead put all down on mortgage. Bank will tell you differnt as they make more interest on mortgage & fees on RRSP investment


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## Eaglyeye (Mar 21, 2017)

Mortgage u/w said:


> If you think 5% is considered high, you either forgot or have not lived long enough to see when rates were 20%.
> 
> 5% is what I would consider a normal rate. Our current rates are abnormally low. I am not saying that they WILL go lower.....but I AM saying that you should not be tempted to lock-in a new rate at the expense of incurring a penalty, just because you're predicting we're at the bottom of the cycle. Heck, I predict the rates will go up too. But I still wouldn't break my term to lock in a perceptibly lower rate. I like to know that I am paying the lowest rate available - rather than pay a higher rate hoping to outsmart the market. Sort of reminds you of an insurance policy, doesn't it? And we all LOVE insurances, right?
> 
> If you want to truly save and _try _to "outsmart" the market, then you should be considering variable rates - not fixed.


Yes you are correct , i did check some of the historical rates going back to 1990's and see that 5% is actually better then paying 20%  . I would love to pay the lowest possible rate as well but this has more to do with the fact as stated by gardner that "make the best of the situation and eking out the last 1/10 percent" . Plus am not sure if i like the headache of paying 6% interest to the bank , i would rather pay something under 3% and have peace of mind ( even if somehow rates go to 2% i wont be bothered much) . 

@ lonewolf i dont have any RRSP accounts and not planning to do so in future as my income is not that high at the moment . 

@ gardner- i do have all the mentioned option available and am currently putting an extra 250/biweekly towards the principal . Might put in another 5k by end of year as am allowed to put the 20% of principal once a year.


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## gardner (Feb 13, 2014)

Eaglyeye said:


> am allowed to put the 20% of principal once a year.


So if you could lay your hands on the 20% -- $60K -- maybe from parents or a HELOC, you could plunk that down, then the IRD should go down to $5200. Refinance with the original (pre-lump sum principle) and repay the $60K. It's a potential way to reduce the sting of the penalty. Even with this, I think you could be looking at the re-finance costs being higher than the amount saved in interest.

Back when we had a mortgage it was a string of 6-month open terms. Since rates were on a downward spiral in the 90s this was the thing to do. I had a friend who renewed his mortgage every month, as the rates were dropping.


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## Mortgage u/w (Feb 6, 2014)

Eaglyeye said:


> Yes you are correct , i did check some of the historical rates going back to 1990's and see that 5% is actually better then paying 20%  . I would love to pay the lowest possible rate as well but this has more to do with the fact as stated by gardner that "make the best of the situation and eking out the last 1/10 percent" . Plus am not sure if i like the headache of paying 6% interest to the bank , i would rather pay something under 3% and have peace of mind ( even if somehow rates go to 2% i wont be bothered much) .


If you were shopping for a new mortgage, then I totally agree in getting the best deal (although, know that its not only about rate). In your case, you're willing to break your mortgage because you feel you don't have the best rate. You also mention it doesn't bother you if rates go to 2% - but its contradicting your intentions.

Back to my original point; you cannot time the market. And I'll ask you again; do you think rates will go up during your new 5 year term and then go back down afterwards? What if they do hit 6% during your term and are still there afterwards? Will you be tempted to break your mortgage again to lock in at 5.99% when the "experts" are predicting even higher rates to come?


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## Eaglyeye (Mar 21, 2017)

@ gardner - yes that could be done as well but then not sure if i will end up saving that way either. a TD rep actually suggested me to get a HELOC of 300k and payoff mortgage altogether as he was offering me 2.39% on the HELOC. And then next year get a new mortgage with them at a lower then 3.59 ( my current rate ) % and pay off the HELOC . Not sure if this is even possible but he did sound pretty convincing , although i dont think i would like to go to that extreme measures to save couple of grand. 

@mortgage u/w- what i meant to say was i wont feel like loosing out even if the rate was 2 % and i was paying 2.7 or something as i know that it was the risk i took to not end up paying something like 6% . I think there must be lot of others who might agree to this. I really really think it will go up more than what i am getting now on a 5-yr fixed (~2.7) .


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## Mortgage u/w (Feb 6, 2014)

Eaglyeye said:


> @mortgage u/w- what i meant to say was i wont feel like loosing out even if the rate was 2 % and i was paying 2.7 or something as i know that it was the risk i took to not end up paying something like 6% . I think there must be lot of others who might agree to this. I really really think it will go up more than what i am getting now on a 5-yr fixed (~2.7) .


But the spread is the same.....2.79% - 2.00% vs 3.59% - 2.79%. Why would you feel comfortable if it drops to 2.00% if your at 2.79%, but not compared to your current situation? Its 80bps either way.

Its clear that you are being influenced by the likelihood of a rate hike in the future. And I get that. But you should not be making such a decision based on that alone. In reality, you are paying a premium to secure your mortgage for the next 5 years. And that's fine if it makes you sleep better. Will it pay off? Possibly. Will the rates jump to 6%? Perhaps. In 5 years from now, will you renew at 6% or higher? Well, if you feel so strongly that the rates will jump within the next 5 years, then you will most definitely renew at 6% or higher. If its such a concern, why not lock in a 10 year mortgage which you can get today for 4%? You see, its all speculation at this point. 

Bottom line, it does not pay to chase the lowest rate. You cannot avoid a rate hike, but you could definitely benefit from a rate drop. 

Don't let the bank beat you. Paying a penalty pays off your 3.59% for your remaining term. You can basically say that you are willing to pay 3.59% + 2.79% (6.38% total) for your remaining term of 12 months (+ legal fees), for the benefit of paying 2.79% for the following 4 years.

In the end, you will probably still break your mortgage. I just hope you understand what I am explaining. I think its important people make informed decisions, rather than "follow the crowd".


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## againcome (Oct 17, 2017)

There are many things to remember when you renew the mortgage.

1) Start shopping around for a better rate four-six months before your mortgage needs to be renewed.
2) Find out what other lenders are offering.
3) Never accept the bank's posted rate.
4) Negotiate on other available options like the amortization period.
5) Change the lenders.
6) If you don't have time to negotiate and research rates, a 
mortgage broker will do the work for you.

Go to the following link, if you want to know further details.
http://www.canadianliving.com/life-...rticle/6-tips-to-help-you-renew-your-mortgage

My friend has got help from a mortgage broker in Edmonton when he renewed the mortgage. Take advice from expertise people before going for mortgage renewal.
Thank you.


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## Pluto (Sep 12, 2013)

I suspect, over the life of a 25 year mortgage, you will pay less in interest if you choose a variable rate. Locking in for"protection" is just to get you to pay more now, and later. Occasionally short rates go up, but they don't stay there forever so a variable rate over 25 years is best.


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## TomB16 (Jun 8, 2014)

Pluto said:


> I suspect, over the life of a 25 year mortgage, you will pay less in interest if you choose a variable rate. Locking in for"protection" is just to get you to pay more now, and later. Occasionally short rates go up, but they don't stay there forever so a variable rate over 25 years is best.


Completely agree. :eagerness:

Calculate the difference a couple of basis points makes over the course of a mortgage to understand how critical the rate is.

$300K @ 2.75% = $115,179.77 interest over 25 years

$300K @ 2.71% = $113,339.29 interest over 25 years

Would you say, "If you sharpen your rate a bit, it would make it an easy decision to get a mortgage here.", and then wait 10 minutes while bank staff chat with their manager, to save $1840? That's more than a payment (pmt = $1,377.80).

Let's say you "didn't worry about it" and just went with the offered rate. At the far end, when you're making your last payment, you will not feel good knowing that you would not have to make that payment at all, if you had groused a little bit and gotten 0.04% better rate.

... but it's a little more nuanced than that. Use one of the graphing mortgage calculators to illustrate the interest curve. Note: "curve". It's non-linear. At the start of the mortgage, interest makes up the vast majority of the payment. At the end of the mortgage, the interest paid approaches $0.

Rate makes a far more significant difference at the start of a mortgage than at the end. Extra payments are also far more significant at the start than the end.

I recommend fighting for the best rate you can get up front and consider taking some risk on a floating rate because the cost of that fixed rate will add years to your FIRE date on the far end.


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## Pluto (Sep 12, 2013)

When I look at the terms outlined in the initial post, I think no wonder RBC stock keeps going up decade after decade. As a RY share holder 5 year fixed customers makes me sleep better.


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## birdman (Feb 12, 2013)

If you are absolutely certain you have no intentions of moving just wait and renew for 5 yrs for the sole purpose of piece of mind. Yes, maybe you may be paying a bit more but as others have mentioned the rates overall are so low compared to what the were in the 80's. Prime hit 22.75% and if you were paying Prime +2% thats a 25% interest rate. Mortgage rates were somewhat lower as there was an inverse yield curve. For many, those rates were unaffordable and they lost their homes. Why take the risk and I would rather take the longer term when rates are at these historical lower levels. No, I don't think rates will go there again in the next while but one never knows for sure. There is no magic answer and to each there own.


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## Mookie (Feb 29, 2012)

Mortgage u/w said:


> If you want to truly save and _try _to "outsmart" the market, then you should be considering variable rates - not fixed.


I personally never understood the logic behind taking a 5 year fixed rate. When I had a mortgage, I always took the variable rate. The sales pitch about peace of mind in knowing your monthly payment won't change is just BS to boost the bank's profits. More often than not, the total interest paid over the life of your mortgage will be lower with a variable rate. 

Mortgage u/w, it seems your wisdom does not compute with the OP. If he wants to pay the penalty, and lock in for another 5 years of "peace of mind", then that's good for those of us who own shares in the big banks.


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## twa2w (Mar 5, 2016)

Mookie said:


> I personally never understood the logic behind taking a 5 year fixed rate. When I had a mortgage, I always took the variable rate. The sales pitch about peace of mind in knowing your monthly payment won't change is just BS to boost the bank's profits. More often than not, the total interest paid over the life of your mortgage will be lower with a variable rate....


Well, I agree with taking the variable rate but not about the bank making more money on a 5 year rate.
The banks actually make a better spread on the variable rate and it makes it easier for them to match funds. Especially when rates are low. When rates are changing the banks love variable rates.
OTOH locked in terms do give them more certainty of balances but portfolios are so big and stable that this is not much concern to a big bank. A smaller lender has more issues around this and matching funds.


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