Monday, February 08, 2010

Mortgage renewal - lock in now or go short?

I had another question about mortgage renewal advice and thought I would share the question and my answer.
The question was:

Hi,

I have been always checking your websites on pointers and I learned so much on it.

Now I would like to ask regarding mortgage. I am due for renewal of mortgage (oct) and cant decide what to do so Im seeking your wisdom,

I have 100,000 left from my mortgage. and now being offered by my current bank to take 2.65% for a year. If I keep the same payment, my banker said I can finish it off in 6 to 7 years.

What I used before is paying a biweekly 650.00 but each month I paid a lumpsump of at least 500.

Now on my renewal, is it best to do the same thing again? Or I can save more if upfront, I decrease my mortgage length instead by paying making my biweekly payment of 900?

Please advise.
Thanks

Rose

My answer
Hello Rose,
I am a firm believer in paying that mortgage off as soon as you can. We may never see today's' rates again. I would go with the short term variable rate and have your bank lower your amortization upon renewal until the payment is $650 or whatever your payment was before. You can get less than 2.65% on a variable rate. This should reduce your amortization to maybe about 5 years, see the calculator here: http://www.mississauga4sale.com/mortgage-amortization-creator.htm
Then you should be able to pay it off in 5 years or so.
Even if the prime rate increases later this year, which it is supposed to, the 5 year variable has to climb to about 4.75% for you to be even compared to the 2.65% mortgage for 5 years and you will still be ahead of the game.
Reason is, it may take 2 years to reach 4.75%, if ever, and then you have saved a pile in interest in the first 2 years of your mortgage. You should be earning more in 2 years from now and look at it as an investment in yourself.
Also, in 3 years, you can renew that 5 year mortgage and who knows, there may be some good specials out there that you can take advantage of.
Please make sure your payments are accelerated bi weekly or accelerated weekly, which I am guessing they are, but please confirm this with your bank.
I am always learning too in this business and I heard another gem of advice the other day. When your mortgage is coming up for renewal, look for a new bank branch opening. They often will give a discounted rate ONLY at that branch because they want new customers coming into the branch and creating accounts and business. This would be a 'branch special' and maybe a great method of getting an even better rate. My colleague who told me this said that you may be able to get an additional .5% off the best rate, because they want new business. I will look for this next time one of our mortgages comes due, sounds interesting! :-)
You should be better off in the long run going short term, read my experience here:
All the best!
Mark

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