A common question that I get from people is whether or not it is worth it to break an existing mortgage agreement in order to take advantage of today’s low mortgage rates.  While it is impossible to give an exact answer on this issue, what I will attempt to do is highlight some of the key issues that someone should consider.
First and foremost is the direction that you believe interest rates will move.  The most important question to ask yourself is - what do you think rates will be when your existing mortgage comes up for renewal? At any given time I could list five analysts that could provide sound reasoning for the rates to go up in the next year, or list five analysts that could provide sound reasoning for the rates to go down.  Let's be honest - if analysts could consistently predict the movement of interest rates and stock markets all the time then they could all take this position on their own investments and happily retire.  What really matters is that you feel comfortable with the decision you are making, and you understand the financial implications of your decision.
While I don’t profess to know for sure what way interest rates are going to move, what I do know is that the time for sitting on the fence and waiting to refinance is over – simply put in my firm opinion, a bird in hand is better than several in the bush. If you don’t believe in that philosophy then here are the hard facts: in the entire history of the Canadian mortgage market there has never been discounted fixed-rate five-year money lower than it is this now. In fact, the last time fixed five-year rates were this low was some 50 years ago, and back then fixed rate discounting didn’t exist.
Conclusion – if you haven’t refinanced your existing mortgage then don’t wait until you have to hear about the unrealistically low rate that your neighbour or fellow real estate investor refinanced at. In fact, at today’s low interest rates even refinancing a rate as low as 50 basis point s or 0.5 per cent higher than existing rates may be able to save thousands by breaking your existing mortgage and/or early renewal at today’s attractive rates. In fact, if you are not thinking about refinancing then my advice to you is to pretty much stop what you are doing and look at it right now.
Typically, most Canadian consumers do not actually take as active a role in their mortgage management as they should. While many people buy and sell investment products on perceived highs and lows on a nearly daily basis, experience shows that they rarely take the time to properly examine the “ups and downs” of their debt.
The classic example of this can be seen when comparing a consumer’s knowledge of their investment products with their debt products. Many people can give a detailed synopsis of what has happened with their $50,000 investment portfolio, but don’t have a clue as to the interest rates that their combined $300,000 worth of debt (mortgages and other loans) is at. If this seems like bad personal financial management, that’s because it is.
Reality dictates that many people have leveraged themselves with lots of debt (not necessarily a bad thing) – something we all need to watch carefully. At the same time, it is important to remember that good financial health is as much a function of debt management as it is a function of investment management. Your home and existing mortgage may be the best form of budget restructuring that you have available to you today. As another interesting point – people should remember that a penny saved could be the equivalent of two pennies earned if you are amongst those who are in the highest tax bracket.
When you look at the mortgage refinancing decision, don’t simply look at your mortgage alone.
Before you discount the advantage of the equity in your home, take the time to carefully write down all of your current debt obligations and rank them from highest interest to lowest. Once you have totalled all your debts then take the time to write your minimum payments beside them. With the two columns side by side – total them up.
Now that we have these totals, it is time to look at the costs of breaking the mortgage. Different types of mortgages have different types of costs or penalties imposed when you break them. Refer to your original mortgage commitment to determine which penalty you will have to incur. In the case of reviewing this figure – don’t leave it to chance. There are plenty of highly qualified Accredited Mortgage Professionals (mortgage professionals who carry the AMP credential) who are formally trained, and more than qualified to run the math – all at no cost to you. Once you have determined this number, then you want to look at the cost savings to you.
When you refinance your mortgage there are two ways that you will be saving money. With a lower interest rate on the new mortgage you will right away have the opportunity to make lower payments. What you really need to determine is what these lower payments will save you compared to the payments you are making now. The second way your new mortgage will save you money is with the principal amount that you end up repaying. With the new lower interest rate, each payment that you make will have a bigger impact on the principal amount repaid. For this reason you should also know the difference in the principal amount repaid on both your current and new mortgage.
As an example, consider a current mortgage balance of $250,000 at 6 per cent, with three years left on five-year term, and with monthly payments of $1,487.06.  The chart below will outline the savings possible over the next three years by breaking the existing mortgage and refinancing at the new lower rate.
Summary of Findings
End Balance
Principal Paid
Current Mortgage
 $     1,487.06
 $    43,616.49
 $      9,917.62
New Mortgage - new lower payment
 $     1,201.56
 $    29,627.56
 $    13,628.70
New Mortgage - keeping original payment
 $     1,487.06
 $    28,995.74
 $    24,538.37
Interest Savings:
 $    14,620.75
If you are going to take this opportunity to roll other debts into your mortgage, then be sure that it makes good financial sense. Only consolidate the debt that is carrying a higher rate of interest than the new mortgage rate will be. Since a mortgage is usually the lowest interest debt that you carry, this will often mean that all of your debts become a part of your mortgage.
With any luck your refinancing decision will not only save you a lot of interest, but also convert multiple monthly payments into one low monthly payment. With all this extra cash flow you will now have the money to do all the other things you want to do - like catch up on your RRSPs for example.  Just be sure to use some of the extra savings to get yourself further ahead financially and don’t continue to go to the lack of saving that has caused disastrous consequences to much of society.
While this review will give you the basics to consider, do keep in mind that this represents only a simple analysis. An Accredited Mortgage Professional (AMP) with a strong track record of results and the right financial education will be more than glad to give you the more detailed overview in exchange for your business.  The best advice is to always do the analysis and spend the time actually crunching the numbers. If you can’t personally perform this type of analysis, then find a trusted source that can. In the case of mortgages – while not rocket science… it pays to leave the fine details to the experts.  
Calum Ross is executive vice-president and mortgage planner with Calum Ross Mortgages. He was recently ranked as Canada’s top mortgage broker by Canadian Mortgage Professional Magazine. He holds both an Honours Bachelor of Commerce and MBA in finance, and is an Accredited Mortgage Professional.

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