Taking advantage of the low interest rate? Check this first

[Yu Liu]

The interest rate in Canada is at all time low, and still dropping every other week. many people start to think if it's a good idea to break your term and refinance in order to take advantage the low rate. Or, many people considering upgrading or downsizing. It might not be as wisely as you think. 

As we know, banks don't like to do unprofitable business. When you break your term, it becomes unprofitable to them. How do they make up the loss? depends on the type of your mortgage, they will very likely to charge you something called IRD- interest rate differential. It could be very costly. 

There are 2 major factors affecting the amount you have to pay, which are the interest rate you are paying and the interest rate the banks are offering. When the gap between these two is big, the IRD could be unbearably large. The thing is, it's changing constantly and you can't really predict. I've seen clients' IRD increases over $10,000 within one month, it changes the story completely. 

At this point, you might want to ask. Is there any way to avoid it? The answer is "it depends". If you are selling your home and NOT looking to buy a new one. Unfortunately, there is no way you can avoid it. The best you can do is to go to a branch and ask them to calculate the penalty amount, and adjust your selling price accordingly. At least you will have general idea what you are getting into. BUT, don't take it for granted as it changes constantly. 

If you are selling your home and looking to buy another one, good news for you! If you are doing business with the same bank, they will very likely to offer you something called "portability program". It gives you an option to "transfer" your existing mortgage into the new one at the same terms and rate. Depends on the bank, they might even offer you a blended rate to drop your interest rate to some extend.

I hope you find this information helpful. If you have any mortgage related question you can always connect with me. I will be more than happy to help you out! 

Jake