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Mortgage Renegotiating Tips

Rates on mortgages have fallen a lot in the past several months, prompting many people to think about renegotiating their mortgage in order to cut monthly mortgage payments. Are your thinking about breaking your mortgage? In other words "refinancing" your mortgage. But there is cost involved. The problem in breaking a mortgage is the penalty that mortgage lenders charge. Its doesn't matter which bank you deal with, all banks including RBC, TD Canada Trust, Cibc, BMO - Bank of Monreal, Scotia bank and all other credit unions and mortgage companies like MCAP, Fist National etc. charge you a hefty break up fee or "penalty". Previously, lenders and banks would charge the equivalent of three months' interest payments, but now they're starting to move towards what is called the interest rate differential (or IRD). The interest rate differential is the difference between your current mortgage rate and today's interest rates. Essentially, it's the amount of money a lender would lose from taking the amount of your mortgage and lending it out today at a lower interest rate. The interest rate differential penalty is usually much higher than the three months' interest penalty.

The first step in renegotiating a mortgage is to ask your lender what your penalty would be. There's no standard method for calculation of penalties, so your number will depend on your lender's own policies and personal circumstances like the amount you've borrowed and the number of years left on your mortgage amortization or term. Another possibility is a blend and extend, where you jump into a new mortgage that blends your existing rate with the lower current rate and extends your term by a few years. There's no penalty charged in a blend and extend, but you won't save as much as you would if you paid the penalty and got the best possible current interest rate. If you have any thoughts of breaking your mortgage, get on it today. If mortgage rates fall further, and they could ease a little bit more, then interest rate differentials will grow in size and cost you more.


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