# Early Renewal of Mortgage?



## carllecat (Aug 3, 2010)

Hey guys, 

We just bought a house with an HELOC and put down 20% of the purchase price, which leaves a 80% LTV. The purchase price price was $359,000 and the HELOC is thus $287,200.

We decided to move into the house and keep the condo we are currently living in as an investment... if we can call it an investment. We basically bought at the peak here in Edmonton in 2007. The purchase price of the condo was around $275,000. I do not think we could get more than $225,000 in the current market. As of today, we are owing $260,000 on the condo. 

My lawyer scared the crap out of me when we talked about the condo as he think that when the mortgage comes to maturity in May 2012, my bank might want to pull the plug and put the condo in foreclosure as he said: ''this has been very common lately". 

We are moving this week and found renters that signed a 1 year lease and are going to cover pretty much the mortgage payments. On top of that, we have a positive cash flow of $1,500/month to invest. 

I was wondering if I should consider an early renewal of our mortgage (we are paying 5.09% 5-years fixed until May 1, 2012). As I am writing this email, the rates are at 3.99% for a 5 years fixed term and 5.19% for 10 years fixed. As our HELOC is 100% variable, I would feel better if I could get something that is fixed instead of variable...

Another detail, my wife is pregnant with the 3rd one and will not go back to work as of Jan 2011, but will run a daycare out of our new place in Jan 2012. The cashflow is going to remain the same (+$1,500/month) even when she is out of work on EI.

Any thoughts on this whole situation? Is it worth going through renewal and have to pay a penalty and at least save the condo from potential risk of the bank pulling the plug in 2 years?


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## HaroldCrump (Jun 10, 2009)

carllecat said:


> Another detail, my wife is pregnant with the 3rd one and will not go back to work as of Jan 2011, but will run a daycare out of our new place in Jan 2012. The cashflow is going to remain the same (+$1,500/month) even when she is out of work on EI.


Hmm...is that ok?
I thought in order to receive maternity EI, you should not be employed.
Your wife would be.


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## carllecat (Aug 3, 2010)

Maternity Leave = EI for 12 months.


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## Shayne (Apr 3, 2009)

As far as your house goes if you want the security of a fixed rate, 2.90% is available for a 3 year term. You will be way ahead of your costs on the Heloc, but you lose the flexibility.

The condo is a different story. I would discuss the scenario more with your lawyer. If the bank will foreclose in 2012 they will not renew early and you will not find another bank to give you a mortgage. You may want to keep that $1,500 a month you have liquid to deal with the situation when you have to. 

PM me if you are interested in your savings by changing your heloc to a fixed rate. I have been saving folks thousands of dollars lately with that rate.


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## carllecat (Aug 3, 2010)

The bank will not necessarily foreclose the condo, but this is something that might happen in two years as it is the case with many other properties in Alberta. 

So is it a waste of time to go to the bank and ask for an early renewal?


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## Shayne (Apr 3, 2009)

I would think it would be a waste of time. Put yourself in the bank's shoes. They have a mortgage of X secured against a property that is worth X-Y. Why would they extend their risk (Y) for a longer period of time?

No lender would lend in that situation so my thoughts are they would not let you renegotiate now either.


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## carllecat (Aug 3, 2010)

...but still if we are making our payments on time, why would they risk to take the house back and have to sell it to someone else. As far as I know, banks do not really want to foreclose a home. 

What are the options then?


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## Four Pillars (Apr 5, 2009)

carllecat said:


> ...but still if we are making our payments on time, *why would they risk to take the house back and have to sell it to someone else*. As far as I know, banks do not really want to foreclose a home.
> 
> What are the options then?


Exactly. By NOT foreclosing, the bank is essentially selling the house to you at the value of the current mortgage with no fees.

If they foreclose, they have fees and will sell at a lower price to someone else.

On the other hand, they will come after you for the difference in price (and will get it), so maybe it is not that nonsensical for them to foreclose.

I still tend to think they would rather not foreclose.


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## Shayne (Apr 3, 2009)

it can't hurt to ask.


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## carllecat (Aug 3, 2010)

Okay. Went to the bank (TD) and told the lady that I wanted to early renew the mortgage for a 5-tears variable term. She told me that I would have to pay a penalty that is either 3 months interests or IRS, whichever is greater. 

However, I read on a website that if your mortgage was insured by Canada Mortgage and Housing Corporation (C.M.H.C.), a maximum penalty of three months interest can be charged only, after the third anniversary of the interest adjustment period or after the third anniversary date from your last renewal. So we only had 19 months left to our maturity date, which is less than 3 years. 

The lady at the bank said is was not the case and I would still have to pay either 3 months of interests or IRS, whichever is greater... Is that true or she was talking baloney? In our case, we would have to pay a penalty of $10,000. However, we would save $173 on a bi-weekly basis and that translates in savings of $4,500/year. Therefore, we would recoup our money in 2 years or so and would still have 3 years paying less than a fixed term mortgage (if interests stay low). 

The current interest rate on our mortgage is 5.09% and the 5 years variable would be prime -0.6 or 2.4%.

Okay, now I need to know if the lady if full of herself when she told me about the 3 months or IRS, whichever is greater, because is could cut the $10,000 we have to pay upfront in half. 

Any thoughts???


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## heyjude (May 16, 2009)

When you rent your condo it will become an investment property, therefore your mortgage payments and other expenses will become tax deductible. Of course your rental income will be taxed, so that may be a wash. But your effective mortgage rate will be lower than it looks. Make sure you make the appropriate "change of use" declaration on your income tax. 

Rather than paying a penalty, I would suggest making as many changes to the mortgage as are permissible, e.g. going to an accelerated biweekly payment schedule, and putting in a lump sum against the principal whenever you are allowed to. That way, when the term is up, you debt will be lower. I don't understand why the bank would want to foreclose if you continue to pay the mortgage.


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## carllecat (Aug 3, 2010)

heyjude said:


> When you rent your condo it will become an investment property, therefore your mortgage payments and other expenses will become tax deductible. Of course your rental income will be taxed, so that may be a wash. But your effective mortgage rate will be lower than it looks. Make sure you make the appropriate "change of use" declaration on your income tax.
> 
> Rather than paying a penalty, I would suggest making as many changes to the mortgage as are permissible, e.g. going to an accelerated biweekly payment schedule, and putting in a lump sum against the principal whenever you are allowed to. That way, when the term is up, you debt will be lower. I don't understand why the bank would want to foreclose if you continue to pay the mortgage.



Thanks for the reply Jude. So you think it would be useless to pay $10,000 to go with the Early Renewal and drop our interest rates from 5.09% (fixed 19 months left) to 2.40% (variable and closed for the next 5 years)? In my mind, this option was not bad since I would have to pay a penalty, but the money saved on the mortgage payments would have total the same amount ($10,000) at the end of 2 years. However, thinking that the interest rate would remain that low would be utopia and a costly mistake... 

Do you guys believe that I should just keep the status quo and make as many extra payments as I can for the next 19 months (until maturity), or pay penalty upfront and go with the early renewal?

That is a tough call...!


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## Shayne (Apr 3, 2009)

carllecat said:


> Okay. Went to the bank (TD) and told the lady that I wanted to early renew the mortgage for a 5-tears variable term. She told me that I would have to pay a penalty that is either 3 months interests or IRS, whichever is greater.
> 
> However, I read on a website that if your mortgage was insured by Canada Mortgage and Housing Corporation (C.M.H.C.), a maximum penalty of three months interest can be charged only, after the third anniversary of the interest adjustment period or after the third anniversary date from your last renewal. So we only had 19 months left to our maturity date, which is less than 3 years.
> 
> ...


I believe that is an old rule. If you are going to save they do it. If not, don't bother.


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## carllecat (Aug 3, 2010)

Shayne, can you please clarify what it means to you?

Thanks,


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## Shayne (Apr 3, 2009)

carllecat said:


> Shayne, can you please clarify what it means to you?
> 
> Thanks,


You are stuck paying the IRD penalty. CMHC changed the rule in 1999.


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## Scottlandlord (May 27, 2010)

Shayne, very informative posts by you on this thread (and others!)

I hope you don't mind that I recommend your posts to those not on this forum as of yet.


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## Cal (Jun 17, 2009)

Four Pillars said:


> Exactly. By NOT foreclosing, the bank is essentially selling the house to you at the value of the current mortgage with no fees.
> 
> If they foreclose, they have fees and will sell at a lower price to someone else.
> 
> ...


If you decide to keep the current set up unchanged, you may want to keep a little savings on the side in case the bank does ask for the difference.


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