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Renewing Your Mortgage? Make The Most Of Today’s Historically Low Rates

April 10, 2012

An April 2012 article from the Globe And Mail engages MonsterMortgage.ca’s own Vince Gaetano about how you can make the most of today’s low mortgage rates and how you too can tackle your mortgage debts.

One strategy for the many Canadians renewing their fixed rate mortgage in 2012, and who interested in continuing with a fixed rate mortgage, is to renew their mortgage at a significantly lower interest rate while still maintaining their current monthly payments.

How does this mortgage renewal work?

As the article alludes to, Canadians who selected to enter into a fixed rate mortgage in the Spring season of 2007 would have secured rates at around 5.7%. If you now find yourself in 2012 and looking to renew, a similar 5 year fixed rate mortgage can be secured at 3.29%.

Using an example of a fixed rate mortgage from 2007 – the article provides the following:

First assume you secured a $300,000 fixed rate mortgage in 2007.

Your mortgage term was 5 years long and you were able to secure a rate of 5.79% With a 30-year amortization, your monthly payments would have been $1,745 each month.

At the end of the 5 year mortgage term, your mortgage balance (the principal remaining on your mortgage) would be $278,184.

Let’s now fast forward to today’s mortgage market – assuming you renewed into a new five-year fixed rate mortgage at 3.29%, your monthly payments would be $1,358, resulting in savings of $387 a month.

The mortgage numbers show that if you pocketed that money and went with lower payments, your mortgage balance on renewal five years from now would be $239,087.

If you kept your mortgage payment at the exact same amount as previously, thereby paying down an extra $387 a month against your principal, the balance on renewal would be $213,914, a difference of about $25,000!

The benefit of having a lower mortgage amount on renewal is double-sided. Not only do you now owe less on the principal of your mortgage, but the next time you renew; you’ll now be paying less interest on your mortgage overall. Having paid down more of your mortgage also makes you less susceptible to fluctuations in mortgage rates.

While this mortgage strategy may not suit everybody equally; such a mortgage really makes use of today’s low interest rates and won’t be too restrictive to your cash flow. When attempting to implement this type of mortgage strategy, it is also very important to ensure that the mortgage product you’re entering into allows you this type of flexibility.

Remember – not every mortgage product offers the same pre-payment privileges.