If you are selling, you need to take a close look at your existing mortgage, especially with mortgage rates declining. There are 2 critical questions to have answered. Is it portable and, if not, what are the discharge penalties?
1. Portability allows you to move your existing mortgage balance, interest rate and term (the number of years remaining on the mortgage) from the home you are selling to a house you are buying. Because portability saves discharge penalties, it's always a good idea to check this feature out.
Need a larger mortgage on the home you are buying? This is a common occurrence.
Most lenders will allow mortgage averaging?
Mortgage Averaging Example:
($200,000 existing x 6%) + ($100,000 added x 4.5%) = 5.5% Blended Rate
÷ by $300,000 total amount needed
The blended rate that determines your monthly mortgage payment on the purchase may be somewhat higher than the current rate. You are, however, saving.
2. Discharge Penalties are usually 3 months interest or the interest differential, whichever is greater. With today's lower rates versus rates one or more years ago, the difference in interest rates can cost $1,000's in penalties.
- i. Example, 3 Months Interest Calculation Example:
$200,000 X 6% = $1,000 x 3 mo's = a $3,000 Penalty
÷ by 12 mo's
- ii. Example, Interest Differential Calculation:
$200,000 existing mortgage at 6.0% with 24 months remaining.
Less current 2-year rate of 4.5%
Interest Rate Differential is 1.5% per annum.
$200,000 x 2 years x 1.5% p.a. = a $6,000 Penalty
That's $6,000 in payout penalty, as the interest rate differential is greater.
As well, lenders may calculate the penalty differently. Some may also add an administration fee for paying your mortgage out early. These are important aspects of selling in today's market. With mortgage rates hitting new lows, the penalties can change from the time you enquire to the closing date. As the existing rate lowers, the penalty can be greater. As a sound practice, get all penalties and costs in writing from the lender.