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Payout Early and Rebook at Low Rates?

Today's low mortgage rates have caused many people to wonder whether they should renew their mortgage early. Will the savings resulting from a lower interest rate amount to more than the pre-payment penalty that they will be charged? There is more to refinancing than just pre-payment penalties.

The Benefits to refinancing early include:

  • lower monthly payments
  • lower balance owing at the end of the term
  • knowing for a longer term what your payments will be
  • the comfort of knowing, until the end of your term, what rates will be at renewal time
  • locking in at some of the lowest rates in 20+ years

Generally, most financial institutions do charge a pre-payment penalty to those who pay out their mortgage before the end of the contracted term. This penalty is sometimes only 3 months interest however, more often it is an Interest Rate Differential penalty (IRD).

Putting this concept as simply as we can, the Interest Rate Differential is:

The difference in interest paid to the lender, between the contracted mortgage rate and the present rate available, for the remaining time left in the mortgage term.

The lenders comparison will usually be made using a similar time period. e.g. if there is 1 year left in the term, the lender may compare to their present 1 year rate - if there are 2 years left in the term , the lender may compare to to their present 2 year rate....

You can win if: the new rate that your mortgage consultant can get for you results in savings larger than the penalty that your present lender will charge you, and you achieve at least one of the benefits listed above.

Don't rely on opinions from newspaper and magazine stories as your best source of financial information. Have a trained professional calculate whether refinancing is the best option for your individual situation.

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