Traditionally, homeowners haven't saved much by breaking a mortgage and switching lenders due to break fees. But rates have now dropped so low that the conventional wisdom is being revised, says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.iStockPhoto / Getty Images
With the uncertainty of COVID-19 still looming over the Canadian economy, it may not seem like a great time to start tinkering with something as fundamental to your economic security as your mortgage. But with interest rates at historic lows, more Canadian homeowners are wondering if refinancing their mortgage may actually put them on a path to greater economic security.
In March, in a bid to stoke an economy hit hard by pandemic-related shutdowns, the Bank of Canada lowered its policy interest rate — also known as the overnight rate, which is the interest rate at which major financial institutions borrow and lend for one day — to a record low of 0.25 per cent. (Changes in the overnight rate influence interest rates for consumer loans and mortgages).
The move had the desired effect, and then some. Even as new home sales nosedived in spring, refinancing inquiries surged and remained elevated as the housing market rapidly recovered through the late spring and summer.
“If your rate is significantly above two per cent, I would look into trying to take advantage of these rates, because in many cases it makes great sense,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
Traditionally, Mr. Golombek explains, most homeowners have been unlikely to realize any significant savings by breaking a mortgage and switching lenders. Any modest savings are typically negated by hefty penalties for breaking the mortgage contract. But rates have now dropped so low that the conventional wisdom is being revised.
“But before you break a mortgage,” Mr. Golombek cautions, “you need to do the math — and the biggest issue is the break fee.”
The break fee for variable-rate mortgages will generally come to three months’ worth of interest. For fixed-rate loans, it will be the greater of three months’ interest or the interest-rate differential. The latter is where it gets a little complicated — and where you’ll want to seek professional advice.
Until Oct. 31, CIBC is offering cash back of up to $3,000 for borrowers who switch their mortgage, to help offset the expense of switching.iStockPhoto / Getty Images
The interest-rate differential is the difference between the rate when you signed your mortgage and what you would pay if the rest of your mortgage term was refinanced at today’s rates. It will vary slightly from lender-to-lender and province-to-province, but can quickly add up.
Figuring out what exactly it will work out to can be tricky, says Mr. Golombek, who recommends using a mortgage advisor to help with the calculations. Fortunately, he adds, “you can usually just speak to them and ask them to calculate it for you.” Or you can approach a new lender to seek advice.
Right now, CIBC is making it easy to get personalized mortgage advice remotely and safely, with mobile mortgage advisors available by phone or secure video conference to help walk through some of the more complicated aspects of refinancing.
Another factor to consider is incentives. Until Oct. 31, CIBC is offering cash back of up to $3,000 for borrowers who switch their mortgage, to help offset the expense of switching.
“It’s an offer dependent on the size of the mortgage,” Mr. Golombek says.
For example, he says you can receive $1,200 for a mortgage between $300,000 and $500,000 and up to $3,000 for a mortgage over $750,000.
“And that can be used to apply to the interest rate differential,” he says, “if your rate was 3.5 per cent from a few years ago and now you can get two per cent — that’s a huge difference, especially with the cashback.”
There are some other factors to consider before you switch: You won’t be able to coast into a new mortgage without proving to a new lender that you’re credit-worthy, which can mean another credit check. And, besides the break fee, there are also some legal and administrative costs associated with refinancing.
If the numbers don’t quite work out, there are other ways to take advantage of low rates, such as switching a blended mortgage that combines the rate you’re currently paying with today’s lower rates, for one that falls somewhere in the middle. This can be a good middle option, letting you stick with your current lender and take at least partial advantage of the new rate environment.
Whatever path you choose, borrowers who’ve never given a second thought to refinancing may never find a better time to revisit the idea.
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