Most Canadians are wishing they could take advantage of low mortgage rates today, but back off when they discover that their existing mortgage lender would charge them thousands of dollars in IRD (Interest Rate Differential) mortgage penalties should they refinance now. 

Imagine that you called your existing mortgage lender and discovered that the IRD penalty would be $9,500!  This is what your lender would charge you should you break your existing mortgage term now, instead of waiting to see what interest rates will be in 21 months when your mortgage comes up for renewal. 

On the surface, a $9,500 penalty is discouraging, but one has to think of why the penalty is so high.  IRD penalties are there to reimburse the lender for any lost revenue should you cancel the mortgage contract early.  In other words, continuing with this lender means that you will be paying the $9,500 in interest in any case, but more slowly until the end of your existing mortgage term.  It means you are paying too much interest now!

The Accredited Mortgage Professionals at VERICO One Link Mortgage and Financial can give you a detailed analysis of what your actual refinance costs would be, versus the potential cash flow and interest savings by refinancing now, while rates are still low.

Every mortgage holder now is facing three choices:  1.  Don't refinance and take a chance on what the mortgage rates will be on your renewal; 2.  Refinance now and pay the IRD penalty but secure a great rate for the next 60 months, or 3.  Increase, blend and extend with your existing lender to avoid the penalties.

Let's look at a real life example: 

Mr. & Mrs. Smith have a home valued at $245,000 which they purchased 39 months ago.  They have a balance of $197,542 on a fixed rate mortgage at 5.99% with 21 months remaining on this mortgage contract.  This mortgage was originally amortized over 30 years, with a fixed payment of $1,355.19 per month.

Their lender would charge them an IRD penalty of $9,126.44 (based on a comparable interest rate of 3.35% (the lender's current 2 year rate) over 21 months).   In order to refinance this mortgage, the mortgage amount would be increased to $207,500 (to cover the IRD penalty, discharge fee, top up of their insurance premium and a small contingency).   The Smiths would like to refinance into a fixed rate mortgage of 3.79%, and are considering shortening their amortization.                        

The Refinance Savings Analysis shows that the Smith's would reduce their mortgage payment by $246 per month, so would recover $12,033 in cash flow savings over the next 60 months. If they reduce their remaining amortization by 2 years, their payment would be $200 less per month, and they would recover $12,000 in cash flow over the next 60 months due to reduced mortgage payment. 

Let's see the results:

Scenario 1 - Do nothing:

The Smith's would pay their existing lender $24,624 in interest over the next 21 months, and assuming they would renew in 21 months at a rate of say 5.25%... (assuming rates are back to "normal"), they would pay $38,580 in interest over the next 39 months.  The balance at the end of the 60 month term would be $182,480.43.

Scenario 2 - Refinance Now and Pay IRD Penalty:

Locking into a 3.79% fixed rate mortgage today would result in interest savings of $18,680 over the next 60 months (compared to the example above).  Their mortgage balance on renewal would be $265.58 higher, plus the cash flow savings of $12,000, less the cost of the refinance at $9,760.03, for a net savings of $20,688 over 60 months.  Add to this the interest savings over the shortened amortization ($129,445), the total saved would be $150,133 by refinancing now!

Scenario 3 - Blend and Extend with Existing Lender:

Most people buy into refinancing with their existing lender thinking that they are "avoiding" the penalty, but the reality is that the lender is blending their current to a high interest rate along with their current interest rate to come up with a new "blended rate".  In this example, the lender would blend their current 5 year rate of 3.99% with the existing 5.99% rate, and use a blended rate of 4.69%, extending the mortgage for 60 months.  In this case, compared to Scenario 2 where they refinance now, the Smith's would overpay $8,410 in interest over the next 60 months, have a net cash flow savings of $10,414, and their mortgage on renewal would be $5,900 less, but net loss of savings would be -$3,898 compared to example 2. 

Get a free, no-obligation Refinance Savings Analysis now and learn how much you can save!