Q. We’re thinking about breaking our existing home mortgage to take advantage of the low interest rates we’re seeing now, and would appreciate some guidance. This is our scenario:

• Mortgage principal: $572,000

• Weekly payments: $746.00

• Interest rate: 3.78% fixed and locked in until December 2023

• Penalty fee for breaking mortgage: $33,000

• If we decide to pay the penalty, we could lock into a four-year mortgage at 1.74% fixed, which looks like it would save us approximately $2,500 to $3,000 worth of interest payments.

Here’s where I think it gets interesting. If we decide to continue paying the same weekly amount of $750 that we do now, and put the extra money towards principal, the difference between that at the new weekly mortgage payment of $570 would be $175—giving us $8,400 per year to put directly towards principal. Over four years, that should allow us to reduce our principal by $33,600. 

It seems like if we should consider breaking our mortgage to take advantage of the lower rate. Are we right?

–Jill and Bob

A. As tempting as it looks, you may be better off sticking with your original mortgage. The real question here might surprise you, and that is: what will your mortgage balance be in three years if you reduce your mortgage rate by 2% and add $33,600 to your mortgage? I say three years, because that is when your current term is up, and the rate will likely change at that time.

Without all of your mortgage information, my figures are slightly different than yours, but I can get close enough that you’ll know which option is right for you. 

Looking at the table below, you’ll see the interest you’ll pay/save and the remaining balance after three years.  

• Current mortgage New mortgage New mortgage + maintain current payment

• Interest rate 3.78% 1.74% 1.74%

• Starting mortgage amount $572,000 $605,000 (with penalty) $605,000 (with penalty)

• Weekly payment $742/week $629/week $742/week

• Interest paid over 3 years $63,171 $30,592 $30,080

• Principal paid over 3 years $56,173 $70,574 $90,064

• Outstanding mortgage principal in 3 years $515,826 $534,426 $514,937

• Interestingly, if you pay the penalty and reduce your weekly payment amount, you will save about $33,000 in interest and apply an additional $14,000 or so towards the principal. However, you will still owe more on your mortgage at the end of three years.

In considering this change, is your goal to get your mortgage paid off or to reduce your weekly mortgage payment? 

If money’s tight and you need to create some breathing room, renegotiating your mortgage may make sense.  

In your case, it sounds like your goal is to get your mortgage paid off, and you suggested renegotiating and maintaining your current weekly payments as a strategy to do just that.  

The table above is showing that even if you maintain your weekly mortgage payments, your mortgage balance is going to be about the same as if you stick with your current mortgage. Some may argue that you could put your weekly savings toward a TFSA rather than apply it to the mortgage, but that is not a guaranteed return.

Another consideration is the interest rate three years from now when your current mortgage matures. If it is lower than the current rate being offered then that is another possible reason not to renegotiate, however, there is no way to know what the rate will be in three years.

To me it looks like you are best to stick with your current mortgage and not renegotiate for the lower rate. In three years when it comes time to renew, if you find your weekly payment will be lower, stick to your current weekly payment as you have suggested. 

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca.

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.