Leslie Lee

The perfect mortgage?
 
Many factors to consider for refinancing to make sense
 
The perfect mortgage is, of course, no mortgage at all. So, the next best thing is to have one flexible enough to pay off the principal as fast as possible.
 
All mortgages are structured so payments in the early years are primarily interest charges: Very little principal is shaved off unless you make sure payments are high enough and frequent enough that a good chunk -- perhaps 50 per cent rather than the usual five per cent or 10 per cent -- is going straight to the principal.
 
Taking advantage of annual prepayment options, usually 10 per cent or 15 per cent of principal, is another way to chop years off an amortization schedule and save tens of thousands of dollars in interest payments.
 
Couple this approach with interest rates hovering near generational lows, and home buyers have a real opportunity right now: Someone taking out a fixed-rate mortgage may be paying as little as 3.69 per cent in interest, which means even more of the monthly payments will be whittling down the principal.
 
But what about those who committed to fixed-rate mortgages when rates were higher? It may now be worth their while to break the existing mortgage and refinance.
 
The problem is homeowners have no legal right to break the contract, said Toronto real estate lawyer Alan Silverstein, who once wrote a book titled The Perfect Mortgage. If you have a 10-year mortgage, after five years you can break it by paying a penalty of three months' interest. But for mortgages of less than five years, there's no law saying the homeowner has the right to pay off the mortgage and refinance under more favourable terms. 

At most institutions, the penalty is the greater of three months' interest or the interest rate differential (IRD). The latter is the difference between the higher rate you had originally agreed to pay and the lower rate institutions would now be able to charge by lending the same capital to someone else.
 
A deal's a deal, after all, and the lender would lose a bundle by letting you off the hook. Even so, refinancing now could save homeowners "thousands." Do not be put off by what looks like a big penalty. It is only one factor. These penalties can also be rolled into a new mortgage so you don't have to come up with the cash." 
 
The best way to find out if refinanicng makes sense is to contact a mortgage professional such as Leslie Lee who will create a free report for you detailing your interest rate differential and the new payment schedule.  You could be pleasantly surprised!