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That five-year mortgage you locked in at an interest rate of 3.19 per cent seemed like a pretty good deal two years ago. But the fixed rate is now sitting at 1.99 per cent, even less for a variable-rate mortgage.

Should you refinance?

It’s a question many homeowners are asking today, says Ron Butler, a mortgage broker at Butler Mortgage Inc., which has offices in Ontario, Alberta and B.C.

“When rates reach historic lows, people stop and say, ‘What should I do about this?’” says Butler, noting that refinancing mortgages is currently a big part of his work. He offers the example of the above numbers as a typical point of comparison for people thinking of breaking their existing contracts and starting fresh.

“It’s an obvious difference; it jumps out at you,” he says.

There’s simple math involved in refinancing your mortgage before the designated maturity date, although the calculations can get complicated. There will be a payout penalty for breaking your contract and you need to find out exactly what it is: “Insist on getting something in writing,” Butler advises.

Penalty clauses can go on for many paragraphs. In the end, there will likely be a calculation called the “interest rate differential” based on what you had promised to pay in interest for the next three years.

Butler says this can be high when the interest rates in the marketplace have dropped significantly. There may additionally be the ancillary costs of the legal work to do the transfer, an appraisal and other fees. You’ll also have to assemble your financial information again so the institution underwriting the mortgage can study your income, debt ratios and other factors, he says.

All of that work can be a hassle, but with a couple of hours of total effort, “maybe you save yourself $5,000; so that’s a pretty good hourly return,” Butler says.

A bank, mortgage broker or credit union will do the calculation for you, he says. There may be an advantage to going back to the same institution you got your mortgage from, which could offer a reduced penalty.

“But the right approach is to shop the market first, so you have a concept of what the best possible deal is,” he says. “Then go back to your own bank and try to press them to give you that same best possible deal – with a reduced penalty.”

The motivations for early renewals can vary from homeowners simply cashing in on better rates to those looking to change the amount or terms of their mortgages, for instance to take cash out of their home for renovations or to pay off consumer loans, says Chris Richards, a mortgage broker who runs the Richards Mortgage Group at Quantus Mortgage Solutions in Calgary.

“The standard analysis assumes that you put the savings back against the mortgage balance and reduce your mortgage-interest expense,” he says, so you can be mortgage-free faster and perhaps retire a few years earlier. His company helps clients do a cost-benefit analysis comparing the monthly savings from a lower rate against the cost to break the current mortgage contract.

Richards notes that if you use the money you save to pay down higher-interest debt, such as a credit card balance, “then your return is even better” and it could have an even greater benefit for your bottom line. His company helps clients look at these potential savings from refinancing, depending on what they do with the cash they save.

Tracy Valko, principal mortgage broker and owner of Valko Financial Ltd., based in Kitchener, Ont., says many people who refinance today opt for variable-rate mortgages, with interest currently as low as 1.45 per cent. They can usually lock in at a fixed rate with the same lender down the road, without fees or penalties.

“It’s hard to know where interest rates are going to go,” she explains. A variable rate gives you time to see what’s going to happen with the economy and “let the dust settle.”

Valko suggests that clients use their interest savings and any extra funds they may have saved from reduced lifestyle costs because of the pandemic to aggressively pay down their mortgages through lump-sum or “privilege” payments. At the same time, many people now working from home, or spending more time there, are looking to renovate or add on to their places, she says, and they see this as a good time to break their mortgages to do that.

In such cases, “make sure that you have a game plan,” Ms. Valko says. For example, with home renovation projects, contractors can suddenly require much more money, which can be a mess if the homeowner has already broken the mortgage, set aside the funds and established a new one. And while interest rates are low and improvements can increase the value of your property, “you still want to pay off your debt,” she says.

Butler says it makes sense for people to refinance and take money out of their homes when there is a clear financial benefit. “If you’re going to finish the basement and get a tenant – and that’s going to be a new revenue stream for you – there’s a sensible economic advantage,” he says.

However, he cautions against taking out money to make a down payment on a rental property or another type of investment, which he calls “using your home as an ATM.”

Many people who do this end up tinkering with their amortization period, often extending it to keep their payments down, he says. That can lead to an “infinite economic debt cycle,” changing people’s financial lives and futures.

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