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Switch After 12 Months?

mortgage-switch One year ago, people were paying prime rate for new variable-rate mortgages. (See: First to Prime)

Today, the market is down to prime – 0.70%, or thereabouts.

For those who got their mortgage 12 months ago, many wouldn’t even consider refinancing as an option. But, an option it is.

Let’s illustrate.

First, we’ll assume our hypothetical borrower has:

  • A 5-year variable-rate term
  • A $250,000 mortgage amount
  • A 25-year remaining amortization

Now, suppose:

  • Our homeowner’s mortgage is at prime rate (2.75%) today
  • She swaps for a new variable-rate mortgage at prime – 0.70% (2.05%)
  • Prime rate increases 25 bps on Sept. 8
  • Rates then stay put until June 2011 (Not our prediction; just an assumption to match the “pause” forecast by most economists.)

Here are the results:

  • Interest savings:  $8,345 (hypothetical over 60 months)
  • Penalty:  $1,719 (three-months of interest)
  • Discharge Fee:  $250 (depends on lender and province)
  • Net benefit of breaking early:  $6,376 (roughly)

For most people, saving thousands over 3-5 years isn’t exactly the worst idea. So, if you’re currently in a variable at prime rate or above, find a mortgage planner to see if it makes sense to switch.

It doesn’t have to be a variable rate you switch into either.  There are arguably even better deals on 1- and 3-year fixed terms.