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Mark Ting's advice on breaking your mortgage to get a lower rate

02/08/2015 04:29 EST | Updated 04/10/2015 05:59 EDT
Mortgage rates in Canada are down and could fall further following the Bank of Canada's 0.25 per cent cut in the overnight lender rate.

But does it make sense to pay a penalty to break your current mortgage and lock in at a lower rate?

On the Coast's financial columnist, Mark Ting offers this advice.

1) When does it make sense to break a mortgage contract?

It often comes down to the penalty.

Variable mortgages are simple — they're typically three months worth of interest which is a relatively small penalty.

Fixed mortgages are much more complicated and the penalties can run into the tens of thousands as they are based on a formula called the interest rate differential (IRD).

Online IRD calculators can help you decide if current interest rates are low enough that it makes sense to break your mortgage.

2) Are there ways to reduce your interest rate differential penalties?

If you have access to a large line of credit, you can take advantage of pre-payment options to reduce penalties.

Use the line of credit to make a pre-payment on your mortgage. This will reduce your mortgage rate, and therefore your IRD penalty.

3) Are all pre-payment options the same?

There are lot of different options.

Typically you can make a lump sum payment once a year for between 10 to 20 per cent of the original mortgage amount.

Any lump sum payment made has to be done 60 days before the re-finance. So if you know you're going to refinance or sell and will be subject to a penalty, plan ahead and try to make your lump sum at least 60 days in advance. The savings can be substantial.

4) Any other tips on ways to reduce the penalties?

Having multiple mortgages helps. Rather than having one big mortgage you can split the loan in several parts. That way you don't have to choose between a fixed or a variable mortgage — you can get both.

Also, if you have multiple mortgages then you can do multiple lump sum penalty-free payments.

To listen to the full interview, along with helpful examples, click on the audio labelled: Mark Ting: Should you break your mortgage to get a lower rate?

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