Lower rates look good, but penalty fess could offset savings
With interest rates easing, Canadians carrying higher-cost mortgages or consumer debt may see a chance to save by refinancing. However, experts are warning borrowers to consider the potential costs before making a move.
Mortgage rates have dropped from about 5.49% last October to just under 4% for the most qualified borrowers, according to RateHub. This drop can reduce the interest rate by 1.5 percentage points on a $400,000 mortgage could save around $338 monthly.
Credit card debt could also be cut, with a $10,000 balance dropping from $167 to just $33 in interest each month by refinancing at the current rate.
“Certainly, there have been people who have acquired extra debt over the last couple of years and now that rates are coming down, it is an opportunity to refinance,” explained mortgage broker and LowestRates.ca expert Leah Zlatkin. “Pay off some of those credit card debts that you’re paying out at, you know, 15% plus, and put that into a mortgage instead.”
According to Equifax, many Canadians have turned to credit cards, pushing outstanding balances to $122 billion by the second quarter – a 13.7% increase from last year. Mortgaged households have seen a bigger jump in credit card debt. This growing financial strain has driven up non-mortgage delinquency rates by 23% compared to last year.
The penalties for breaking a mortgage vary widely. Variable-rate mortgages often carry a straightforward penalty of three months’ interest. For fixed-rate mortgages, though, the penalty can be more complex.
Many lenders base their fee on an interest rate differential, which takes into account how far the loan is into its term and the difference between the original and current interest rates.
“It’s very nuanced,” said Zlatkin. “It really depends on you and your lender.”
Beyond penalties, refinancing often incurs legal fees, appraisal charges, registration fees, and, if changing lenders, discharge fees. While the terms are usually spelled out in the mortgage contract, consulting a mortgage broker can help borrowers better navigate these variables.
Timing is also crucial. With rates expected to continue falling, acting now could be a smart move to avoid future increases in penalties tied to interest rate changes.
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According to Beutel Goodman Investment Counsel, five-year Canadian bond yields are already pricing in a potential cut from the Bank of Canada to 2.5%. However, if rates bottom out at 2.75% as anticipated, fixed mortgage rates could climb again.
Mortgage strategist Robert McLister advised locking in a rate now to hedge against future inflation or rate increases.
“The market’s expectations can change dramatically,” he said. “Securing a rate now protects you in the event that inflation pops up in the next few months.”
For those who don’t want to refinance, a home equity line of credit (HELOC) may be an alternative, though McLister sees this as better suited to short-term needs.
However, he cautioned that some might face challenges in refinancing if they have poor credit, face potential job loss, or see a drop in home value.
For most, consolidating debt at a lower rate reduces monthly payments, improving the debt service ratio and helping with mortgage qualification.
“If you consolidate debt and all of a sudden you’re paying off all of this revolving debt, that’s a good thing,” McLister said.
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