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Mortgage Refinance Canada

Mark Cappel
UpdatedApr 28, 2010

Should I pay the pre-payment penalty and refinance my mortgage or wait until it is due and take my chances on rates then?

I reside in Ontario Canada and the value of my mortgage is $80,000. I have a 5-year, closed mortgage due November 1, 2010. My current interest rate is 4.8%. I am wondering since the interest rates have been steadily increasing and are currently at approximately 6%, is my best option to pay the penalty to get out of my mortgage early and lock in at the current interest rate or wait it out until November?

We do not have experience with Canadian mortgages, and there may be significant differences between prepayments rules, interest rates and other terms, on mortgages for Canadian real estate and US real estate.

A couple of clarifications: 1) interest rates are not increasing (at least not in the US) as I write this in April 2010, and you should be able to find a new mortgage at around 5%, assuming your credit history is strong, you have available equity in your home, and your income-to-debt ratio is solid, and 2) confirm with your current lender/ servicer that you have a prepayment penalty on your loan. A five-year prepayment penalty is uncommon (prepayment penalties are slowly going away in US mortgages), so my sense is that you may have a balloon payment due in November. If that is the case, then there may be no penalty.

However, if you confirm with your lender/ servicer that there is a penalty, then calculate what the exact penalty will be (it should be 1% of your outstanding balance or less). If you refinance now, you are basically paying that penalty to offset the risk that interest rates will rise between now and November. If you decide to wait, the risk is that rates will increase between now and November. It is impossible to say with any certainty whether or not rates will rise, but they have been low for a year and a half, and they remain very attractive currently.

I hope this information helps you Find. Learn & Save.