# How to maximize your mortgage?



## michika (Apr 20, 2009)

We purchased in October of last year, and currently we are paying on a fixed-rate mortgage.

Currently we are paying 5.45% and their lowest advertised rate is 2.25%. After running the numbers we've figured out that the payout penalty is about $20,400 give or take $1500 to re-finance Clearly this is an illogical choice, and doesn't benefit us.

Can someone recommend how else we can make the best of our high fixed interest rate? We've maximized our payment ability at the moment, plus we've recently changed to weekly accelerated payments from bi-weekly. 

Beginning next year, we have intentions to start putting down 5K per year in lump payment(s), plus we want to increase our (principal) payments by the maximum allowed, which is 15% once a year.

Is there anything else we can be doing?


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## archanfel (Apr 7, 2009)

How big is your mortgage?


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## michika (Apr 20, 2009)

Right now, as of Wednesday its $371,149.13...big to the tune of $2600/mth including property taxes...but its all mine!


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## Sampson (Apr 3, 2009)

That's about all you can do unless you want to pay the penalty.

Although $20k seems like a lot, depending on,

a) time left on your current mortgage (based on the penalty, I'm guessing its a long time)
b) how much of the maximum lump sum you can make at the beginning of each year.

It may actually be worth it if you change. I'm guessing the 2.25% is actually reflection of the prime rate, and although an institution MAY give this to you for a short period (3 months) its unlikely you'd get this rate over 5 years.

If you provide some numbers (or approx.) I can run them through a model I've been working on.


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## Sampson (Apr 3, 2009)

The way most interest rate differential penalties work - they will actually be very close to the amount of money the bank will have lost if for example, you leave them with no penalty and sign on again at a lower rate.

These assume no top up payments.

So assuming the new interest rate spread is big AND you put all the money saved on the minimum payment right back into the mortgage payment, then you should come out on top.


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## archanfel (Apr 7, 2009)

Hmmm.... I'd think it would make sense to break the mortgage if 2.25% is a fixed rate and you can lock it for 20 years. 

You should be able to save $600 a month. You should be able to get that money back in 3 years. Also, the bank that you switch to might be willing to shoulder some of the penalty.


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## lb71 (Apr 3, 2009)

archanfel said:


> if 2.25% is a fixed rate and you can lock it for 20 years.


Sign me up!!!


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## archanfel (Apr 7, 2009)

lb71 said:


> Sign me up!!!


That's why I added the if there. It looks like an incredible deal if it is fixed rate.


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## Sampson (Apr 3, 2009)

Michika, I have know idea when you started your mortgage, so that plays a big factor.

But....

Assuming you started your mortgage at $400k on Jan 1/2008, even at a more reasonable 5 yr fixed rate of 3.69% 

- and you maintain your roughly $1250 biweekly payment (even though minimum on the new rate would be $1004)
- and top up annually by $5000

You're better off breaking and getting the new rate.


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## lb71 (Apr 3, 2009)

archanfel said:


> That's why I added the if there. It looks like an incredible deal if it is fixed rate.


Ya, I agree. 

michika -- you have to understand that the 2.25% is most likely a variable rate, or a one year teaser rate. Eventually, this rate will go up. So the $20k penalty may end up costing you more. You'll have to provide more details on this rate or go talk to the bank.


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## michika (Apr 20, 2009)

Per a phone call with the lender on Wednesday, to break and get the 2.25% we'd have to go through the qualifing process again, plus there is the breaking penalty. 

So we'd be looking at having to qualify for just about $390K, give or take, if we break it I believe. Given that we would be getting an extra $600 if we did, I would undoubtably be reinvesting it right back into my mortgage as weekly lump sum payments.

I just looked on the website and the numbers are different today:
6 month convertible 1 year -4.90%
closed 1 year - 3.20%
closed 2 year - 3.69%
closed 3 year - 3.89%
closed 4 year - 3.99%
closed 5 year - 3.89%

So I called...they were "experiencing technical difficulties" with the front end of their site, which is why all the rates seemed so low on Wendesday I guess. Definitely seemed to good to be true, but for the 15 minutes of my time it took to check, it could have definitely paid off.

Sampson,

Amort - 20 years, 8 months
Remaining - 4 years, 6 months
First payment came out October 3rd, 09, I believe.

What else do you need?


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## Sampson (Apr 3, 2009)

michika - just the number/name of the institution - and whether it is a teaser rate. I'd take a variable rate at Prime flat.

Let me run some numbers for you.


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## michika (Apr 20, 2009)

Supposedly not a teaser rate per the guy on the phone. However it was First National (firstnational.ca). Again per the CSR, it would be one of the posted rates if we did it today.

Variable is prime + 0.75%, and currently prime is 2.50%, with it dropping to 2.25 on May 1st.


Thank you!


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## Sampson (Apr 3, 2009)

oops, that's prime + 0.75% - so in actuality it would be 3% you'd be paying, and the rate is variable.


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## DAvid (Apr 3, 2009)

Strikes me you would save about $95,000 over the 17 years remaining on the mortgage, if you made that change. Since you can renew in 4.5 years, this number becomes less meaningful, as you can completely re-negotiate at that time, so your savings could be less. 

Also, if you had no appetite in September or October to have a variable rate mortgage, what has changed that variable is now palatable. VRM will be increasing by late 2010, so your advantage will lessen. Your savings on a bi-weekly accelerated are about $180 per payment, provided prime remains at 0.25%.

If you take the 3.89% 5 year, you save about $100 per bi-weekly payment, reducing your amortization to 18 years, and saving about $65000.


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## George (Apr 3, 2009)

DAvid said:


> Strikes me you would save about $95,000 over the 17 years remaining on the mortgage, if you made that change.


Not true - the interest savings will only occur for the new term - no bank is going to offer a very low rate on a 17-year term (if they offer such a long term at all).

Realistically, the penalty for breaking the mortgage isn't worth it - use that money in extra principal payments, and keep an eye on interest rates. As the end of the term draws closer, the penalty for breaking the mortgage will become smaller (especially with some large prepayments), and it'll make more sense to break the mortgage and sign on to a lower rate.

Realistically, though, a 5.45% rate on a 5-year term is a very low rate. It could be lower, but keep in mind that the historical average for 5-year fixed rates is around 8-9%.


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## michika (Apr 20, 2009)

We chatted about it over the course of the weekend and we've decided not to attempt to change the rate. While we realize that we could in the long run save some money, the idea of rendering ourselves further in debt isn't something we are prepared to do.


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## Mike H. (Apr 15, 2009)

One idea to lower your effective annual interest rate:

1. Determine exactly what your pre-payment options are. I know with my mortgage, I can increase my regular payment by 15% per year, AND prepay 15% of the principal, AND double any payment.

2. Determine what your equity is.

3. If you have sufficient equity, arrange a secured line of credit. This should be at about 3.25%. Use the secured line of credit to access ALL of your prepayment options; above and beyond what you want to do with your own cash. You can convert a large chunk of your mortgage to 3.25% pretty quickly; reducing both your interest costs; as well as any pre-payment penalty if you decide to renegotiate your mortgage in a couple of years.

Cheers!


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## Sampson (Apr 3, 2009)

Michika,

Since you have decided you don't want to take on more debt for the penalty, you may be one of those in the situation where a free 'blend and extend' could be of benefit.

The mortgage will get divided into two portions (the size of which depends on how far into the term you are) - one portion is amortized at the higher (old) rate, and the other at the lower rate.

The potential downside is that you are locked in for a new 5 year term. You may want to check out this no-fee option, and locking further into the future with the prospect of inflation coming may not be a bad idea.


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## michika (Apr 20, 2009)

Mike,

1. Same as you, although I also have the benefit of unlimited principal payments via lump sums.

2. My equity is just over 5k, which really is nothing. The mortgage is still sort of new.

3. Not enough equity, unfortunately. 


Sampson,

I'll look into the blend & extend option and see if it is an option!


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## Mike H. (Apr 15, 2009)

michika said:


> Mike,
> 
> 1. Same as you, although I also have the benefit of unlimited principal payments via lump sums.


I am sure you DON"T have the option of unlimited principal payments without penalty. You can prepay any amount; but the portion beyond the 15% per year will be subject to a penalty of the greater of three months interest or IRD.

Otherwise, you could just pay out the entire mortgage in one lump sum with a new, lower rate mortgage.


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## Amanda (Apr 3, 2009)

Hey Sampson,

I've been wondering if I should look into taking the penalty and breaking the mortgage in order to take advantage of better rates.

My numbers are as follows:

5.5% fixed interest rate (Closed)
98 000$ left to pay 
A Little more than 2 years left on this current mortgage until its up for renewal (August 2011)

I've been paying off large chunks every year and plan to have it paid off by July 2011.

What do you think? Is it worth it to try and take advantage of the low rates or would the amount saved be very little?


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## George (Apr 3, 2009)

Amanda said:


> Hey Sampson,
> 
> I've been wondering if I should look into taking the penalty and breaking the mortgage in order to take advantage of better rates.
> 
> ...


You'll need to call your lender to find out the penalty for breaking the mortgage, and then determine if the interest savings on a new mortgage are substantial enough to warrant paying the penalty.

If you can get a 3.8% rate, you'll save 1.7% in interest each year (5.5 minus 3.8) - on a $98,000 balance that's only $1666, but interest savings will get smaller over time as the balance is paid down. The "real" interest savings will be smaller, especially if you're making large prepayments.

I don't think it'd be worthwhile to bother with the penalty, especially if you'll have the mortgage paid off before your current term expires.


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## michika (Apr 20, 2009)

Mike,

I went back and double checked with the mortgage company about their policy of lump sum payments. They are unlimited for the first year, then afterwards it is limited to 15% of the principle. They're are some other hoops to jump through, like how payments have to be remitted, but that is all pretty minor. There is a clause though that does say we cannot payout the mortgage with another mortgage.


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