Realty Times: Canadians Renegotiating into Near Peak Rates

October 10, 2000

Canadians Renegotiating into Near Peak Rates
by PJ Wade

Canadians who face renewing their mortgages now may be kicking themselves for not renegotiating their mortgage before rates began to climb. Financial experts say rates should be lower by next year so choosing a short term may be the answer now.

"Mortgage rates will ease once evidence of slower economic growth, softening in the labour market and consumer spending, and weaker price increases in Canada and the U.S. solidifies over the coming months," according to Ali Manouchehri, senior economist at Canada Mortgage and Housing Corporation's Market Analysis Centre.

But the real question may be, "Why haven't you renegotiated your mortgage yet?"

You do not have to wait until the maturity or due date of your mortgage to renew. Yes, there may be a penalty to pay, but taking advantage of a good rate may still give you a financial advantage. Next time rates move down, seize the day! Get the facts and do the calculations so you can decide whether renegotiating at that time will save you money. If it will, then act. If not, you have the satisfaction of knowing that you made an informed decision — and you'll be ready if rates go down again.

What should you do to decide? Each mortgage contract is different and the differences are important. Always get everything in writing — including printouts of calculations and projections. Verify that renegotiation is possible under the terms of your mortgage and then gather the facts you'll need for your decision:

The cost of saving money Find out the penalty for renewing. Mortgages that are fully open can be prepaid without penalty. The rest carry penalties. Don't abandon the project when you hear your penalty is three months' interest or what may be worse, the interest differential — an amount equivalent to the interest the lender will lose by giving you a lower rate. Ask your lender to translate the penalty into dollars. Also find out what administration fees or other expenses are involved. Try negotiating to decrease these costs — you don't get if you don't ask.

The savings Renegotiating is worthwhile only if what you save is more than the cost of refinancing. You'll need the lender's calculation of the mortgage's outstanding balance for this step. If your current mortgage rate is 2% or more above the current rate, you may save even after paying a penalty. Computers and online calculators make mortgage calculations relatively easy. Your lender or financial advisor can also help you with the number crunching, however the latter may charge a fee for the service.

Renegotiation Cautions A short period before renewal (usually 30 or 60 days), you can renegotiate your mortgage without penalty. On the maturity date, the mortgage can be paid off or refinanced without any penalty, even if you decide to move your mortgage to a lender that offers you a better deal.

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