Are You Leaving Money on the Table? The Case for Refinancing Your Mortgage Now
Are you potentially leaving money on the table with your mortgage? For homeowners with a mortgage rate over 5%, now may be the perfect time to consider refinancing to lower it to around 4% or less. This step-by-step guide shows how refinancing could save you hundreds each month, with breakage fees recouped in as little as a year.
Why Refinance Your Mortgage Now?
Refinancing lets you benefit from a lower interest rate, which reduces your monthly payments and overall interest costs over the mortgage term. With current rates dropping, many homeowners paying 5% or higher could refinance at or below 4%, seeing substantial monthly savings. Plus, due to a temporary calculation gap in breakage fees (the costs for breaking a mortgage early), the penalties are unusually low.
This creates a rare opportunity to refinance cost-effectively. Here’s an example:
Example Scenario: You own a $750,000 home with a $450,000 mortgage. Refinancing from 5% to 4% interest would save approximately $308 per month. With lower breakage fees, you’d likely cover the fee in just over a year, making every month after that pure savings.
Understanding Breakage Fees and the Cost-Benefit of Refinancing
Breaking a mortgage typically incurs a fee, but because banks haven’t fully adjusted the calculations on interest rate differences, the fees are currently lower than expected. This is a window of opportunity for mortgage holders to take advantage of:
Lower Breakage Fees: In the example above, the breakage fee is approximately $5,850. By refinancing to save $308 monthly, you could recover this cost in about 1.09 years. After that, each month’s $308 saving becomes profit.
If you have two or more years remaining on your term, refinancing could save you significant amounts. The savings are even higher for larger mortgages, as monthly interest reduction multiplies.
The Process: How to Start Refinancing
Refinancing may sound complex, but the steps are straightforward. Here’s a streamlined approach to get you started:
Calculate Your Breakage Fee: Start by using an online mortgage breakage calculator or contacting your lender to get an estimate. This will give you an idea of the fee for breaking your current mortgage term early.
Estimate Your Break-Even Timeline: Compare your breakage fee to your potential monthly savings. If you can break even before your renewal date, refinancing may be worthwhile.
Complete a Quick Application with a New Lender: Mortgage refinancing applications are typically faster than purchase applications, often taking about 15 minutes. Many lenders allow a portion of the breakage fee to be added to the mortgage if you’d prefer not to pay it upfront.
Consider Bigger Savings for Bigger Mortgages: If your mortgage is larger—say $600,000 with an $8,000 breakage fee—the savings potential grows, with lower rates generating even more monthly savings once the fee is covered. Larger mortgages mean bigger long-term gains.
Additional Considerations
To ensure refinancing is a smooth and beneficial process, here are some fine points to consider:
Lender-Covered Costs: Many lenders offer subsidies for lawyer fees and appraisal costs, meaning the breakage fee is often the only cost.
Rolling the Breakage Fee into the Mortgage: Most lenders allow part of the breakage fee to be added to the mortgage, easing the initial cost.
Savings Multiplied: Larger mortgages create more opportunity, so if you’re carrying a high balance, the savings can add up even faster. Each case is unique, so it’s wise to work with a mortgage professional to understand your specific numbers.
Why This Opportunity Won’t Last
Interest rates are always subject to change, and banks will eventually adjust breakage fee calculations as rates fluctuate. This makes now an ideal time to act if you’re considering refinancing, as the current favorable conditions may not last.
Final Thoughts: Is Refinancing Right for You?
With rates declining and banks temporarily offering lower-than-normal breakage fees, refinancing now could mean significant savings on your mortgage. Every homeowner’s situation is unique, so performing your due diligence is essential. A mortgage professional can walk you through the numbers to see if refinancing aligns with your financial goals.
BOTTOM LINE
Refinancing offers a unique opportunity right now, but this window won’t last as rates continue to fluctuate. Every case is unique, so doing your due diligence is essential. If you’re curious about your specific situation, we’re here to help guide you through the process.
Level Up Mortgages is a mortgage broker team focused on helping the self employed, new immigrants, non-residents, and investors, access best rate and alternative lending in Canada. We have been nominated for best up and coming broker in Canada in 2021 and have been on CTV News and various publications because of our education-first approach to helping you always stay a step ahead of the process. Reach out to us for access to our first-time buyer course or a mortgage strategy session.
See What You Qualify For Or Contact Paul To Get Your Pre-Approval.
Paul Davidescu (www.levelupmortgages.com)
Level Up Mortgages
604-809-3188
paul(at)levelupmortgages.com
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