If you have been locked in a fixed mortgage, especially a closed fixed mortgage (or even a collateral mortgage – ask me about this beast!) you are likely tied in, not just in a higher interest rate, but you also are locked in with the lender and your attempt to refinance can easily cost you $30,000-$40,000 in penalty to break the mortgage (I just rescued a referred client in Mississauga, who came to me for refinancing and his original bank wanted $27,000 in penalties to break the mortgage). That is true, the penalty to break a fixed mortgage is stupendous!!! This is one way that lenders lock in clients to ensure they will not leave to another lender anytime soon, at least not before their mortgage term is up. Why didn’t they tell you about it? They probably did, at least somewhere in the small print, but you probably weren’t paying attention or didn’t care much at the time you signed up for that mortgage, or even worse – fixed mortgage may have been the only mortgage type any lender was willing to approve you for.
Whichever the case you may have a good reason to break that mortgage now and refinance at super low variable interest rates for mortgages we are enjoying now. If you are paying anything over 2.5% on your fixed mortgage, and depending on your mortgage balance, it may actually make sense and believe it or not SAVE MONEY to refinance and switch from fixed interest rate mortgage to a variable interest rate mortgage.
How is this possible? How can it be cheaper if I have to pay a penalty?
As you get closer to your end of term on your fixed mortgage, your penalty to break your mortgage becomes lower and lower. Depending on the size of your current mortgage, that penalty may be only a few thousand instead of tens and tens of thousands. Therefore, by switching to a variable interest rate mortgage, your payments will decrease, you could pay off your mortgage faster as the rate goes lower and lower, and your penalty to break a variable mortgage reduces to only 3 months of interest in most cases, and in case of an open variable interest rate it could be as low as just $300-$500 dollar penalty, depending on a lender.
Please keep in mind that there is one drawback to switching or refinancing!
If you have been paying off your mortgage for many years, and you are lets say more than half way to paying off your mortgage, chances are that more of your monthly payment is not going towards the principal instead of the interest. By refinancing, (another words, getting a new mortgage) you start again, by paying down more of the interest first then the principal. How ever, most of the times, this is insignificant hinderance, and refinancing benefits outweigh this most of the time. I would be happy to tell you if refinancing in your situation will be beneficial or detrimental over all. Call me to discuss or chat with me right now on my website chat window.