A number of years ago lenders were offering 2.99% for a five year fixed rate mortgage and we thought “ Wow what a low interest rate!” Rates couldn’t possibly get lower. Well, they did with many lenders now offering 2.64%. These are the lowest rates in history and while I believe they will remain low for a while longer, they must eventually go up. Here are a few strategies to keep these low rates even longer.
1) Refinance early to preserve low fixed rate for five more years
With this strategy, you would payout your existing fixed rate mortgage, incur a payout penalty and renew into a new five year mortgage at a lower rate. This is partly a numerical exercise as we compare the interest savings with a new lower rate to the payout penalty incurred. Even in cases where the savings do not offset the penalty, you need to consider the possible future interest savings as a result of extending your term and possible higher interest rates in the future. I can calculate all this for you as well as let you know what interest rates would need to be in the future just to break even.
2) Refinance early for increased cash flow
This strategy is not as concerned with the interest savings by refinancing into a lower rate as it is in reducing the monthly mortgage payment. A lower monthly mortgage payment could free up cash flow which can then be used to invest in products that earn a higher rate of return than the current low mortgage interest rate. So you use the extra cash to invest, earn a higher rate of return and use this extra profit to offset the payout penalty as well as pay off your mortgage faster. This strategy typically works best when consulting with your financial planner.
3) Refinance your variable rate to a lower one.
At one time, lenders were offering Prime less .90% and that went away as lenders were not making any money with such a low Prime lending rate. Lenders started offering Prime plus 1 and over many years have now come back to offering Prime less .70%. It may be time to refinance your higher variable rate mortgage into a lower one. The nice thing with Variable rate mortgages (versus fixed) is the payout penalty is only three months interest. There is no Interest Rate Differential payout penalty for variable rate mortgages. You get a lower payout and better interest rate!
Please feel free to call me to further discuss and determine which of these strategies work best for you. As I mentioned previously, I can do all of the calculations for you.