Did you know you could save thousands of dollars over the life of your mortgage with favourable terms that tend to get buried in the fine print? As a broker, I make sure to obtain the most flexible mortgage possible for the simple reason of being able to time interest rates.

Buying a home already has a ton of work involved and securing the best rate at the time is of course important, however you can’t time the interest rates. Generally, your purchase is going to happen in a specific time from over 3 to 6 months and we are limited to the best rates available during that time! With favourable mortgage terms though, it is possible to time the markets mid term and reap thousands of dollars worth of rewards. I’m going to take some time and work through a couple examples here after a bit more of an explanation.

Mortgage Terms to Watch

There is one very important term to be aware of when taking out a mortgage, prepayment penalties, and more importantly how the interest rate differential is calculated. Every lender has one, but how they calculate it can vary greatly from lender to lender. For more information on that topic, refer to this post here.

The second term relates to you receiving a collateral or standard charge mortgage. A collateral charge makes it more expensive to move your mortgage as it creates legal fees since you must discharge and reregister charges against the property to move your mortgage. Many lenders don’t provide an option to register the collateral vs standard mortgage, but I’m here to make sure you’re setup with what’s appropriate for you. If you want to learn more about collateral and standard mortgages check out my post here.

Why does timing rates matter? Do they really change that much?

Did you know a year ago today new purchase rates were 3.69%/year for a 5 year fixed? Today you’re looking at 2.69% for that exact same mortgage, an entire 1% swing in the course of a year! But you signed a 5 year contract (which is by far most common) so how can I take advantage of reducing my interest and payments? Good news, you can break your current mortgage, for a fee, and then move into a new term that both secures you a much lower rate AND grants you that security by getting you setup for the next 5 years.

It's hard to visualize actual savings on this, so I’m going to jump into two examples! The first being if you did your mortgage through one of Canada’s major banks, the second if we went through a Monoline (A fully licensed mortgage company that doesn’t partake in all the other things regular schedule I banks do, they only do mortgages).

Example 1, Original mortgage completed through RBC

I’m going to pick on RBC here because they have some of the worst penalty fees in the business. Here are the parameters for the example:

·         Original rate – 3.69%

·         5 year term, 2 years into contract

·         25 year original amortization

·         Current rates 2.69%

·         Standard mortgage charge

·         300k mortgage

So, by this example from an RBC mortgage you would have to pay $7,733.79 to save 862.51 over the next 3 year of your remaining amortization. You do save $155.60 off your monthly payments which puts cash flow of $5,601.60 back into your pocket over the 3 years. The last benefit is that you secure that lower rate for 2 extra years beyond your current term.

All in all, not that appealing to spend the time to save $862.51, especially since you have to front $4,733.79 (you can capitalize 3k back into the mortgage without refinancing) just to get this done from your own resources (or refinance, which I wouldn’t recommend in this scenario)

Example 2, Original mortgage completed through First National

I recommend First National to a lot of clients for their fair penalties and quality mortgage product. We’re going to look at the exact same scenario, in the exact same mortgage product.

Same interest savings, same monthly payment difference, different penalty. You’re saving are over $2,000 dollars more here and you’re going to get that 2.69% for an extra 2 years after the 3 years are up. My general recommendation is that if we can save over $1,500 while securing you a better rate, then we should do it. This is well within those guidelines now! The out of pocket cost is also greatly reduced.

Bottom line, if you signed up through RBC originally, or any major bank for that matter, you’d be stuck. Now you get to listen to your neighbour tell you how their broker just dropped their rate 1% a year mid term. I should note that both penalty fee calculations are taken straight from each lender’s website.

Summary

This is just one example of how to save money beyond getting the best rate at the time of getting your mortgage. The numbers vary a lot from mortgage to mortgage, but I can promise you one thing. There will ALWAYS be a dramatic different in cost between the bank and Monoline when it comes to exiting your mortgage early. The bank makes it next to impossible to change mid term, where as Monolines provide a fair penalty to make all this possible.

If your rate is over 3% a year you should reach out for a free consultation. I’ve had deals that have ran over 10k in savings after penalties. I provide market comparisons for all my clients on their one-year anniversaries each year after funding providing full comparison on current rates vs their current product. Does your bank provide you with options for saving money on your mortgage throughout the term or do they just collect payments until renewal? If not, consider making the switch.