Just over two years ago when the credit crunch hit the Canadian economy the variable rate mortgage product went from prime -.75 or -.80 to prime + 1.00%. Over the following years the lenders gradually began discounting the variable rate mortgage again, coming down from prime + 1.00% to prime + .60% to eventually today where it is averaging prime -.75%. We are talking nearly 2 full points decrease. As fixed rates were much higher in 2008 and 2009, taken a variable mortgage was still a good option. However there is an opportunity now to take even more advantage of the variable mortgage rate.
If you a current variable mortgage holder with a mortgage at prime + ?, you may want to consider breaking your mortgage and moving into a new variable mortgage. One of the best features of a variable mortgage is that it only costs 3 months interest to get out off whereas a fixed rate mortgage can cost an arm and a leg to break.
On a typical $300,000.00 mortgage with a current variable rate of prime +.60% or 3.60% (prime is currently at 3.00%) the penalty cost to break the mortgage would be $2700.00 plus discharge fees of roughly $250.00. That is $2950.00 in total or $3000.00 to round it off.
A variable mortgage today is averaging 2.25% which is a difference of 1.35% over a variable mortgage of 3.60%. If the borrower has three years remaining on their variable mortgage at 3.60% over a 25 year amortization and you switch them into a new 2.25% mortgage the difference is savings would look like this
In interest over the next three years you would save $11,000.00 (This is achieved by having a lower mortgage payment)
In the next three years you would pay down your loan by an extra $3500.00. So even with your penalty included you are still up $3500. Not bad.
However here is the real Kicker and how you can truly benefit. What if we keep your current mortgage payment on 3.60% the same on the new mortgage of 2.25%. So that means all the extra mortgage payment is now going to principle i.e. paying down the loan. You are used of this mortgage payment . Now the figures change drastically . Now you have reduced your principle/loan down by $13,000.00 and your amortization down from 20 years remaining after the term to 16 years remaining.
You see the real benefit in obtaining the lower interest rate is applying the existing mortgage payment. That is where you can really save money. However you can still take the lower mortgage payment on the new rate of 2.25% and still save money or increase the payment by some and keep some back for yourself.