Along with the stock markets and the general economy, mortgage rates have been plunging as well.  Central banks are lowering rates to try and stimulate the economy, so that those of us with mortgages have a potential opportunity to save money.

It’s Renewal Time…What To Do?

If you’re up for renewal soon, it’s even easier to decide: just pick a new term and shop around for the best rate.

Time Remaining Before Renewal…What To Do?

If you still have some time remaining before renewal, you are left to try and decide if you should break your mortgage early to get a lower rate.

Consider the following:

1. You simply want to break the mortgage and renegotiate it at a better rate but for the same remaining term.  So if you have three years left at 5%, for example, you’d like to get a new mortgage with a three year term, at a lower rate.
2. You want to break for a lower rate, but also change the term.  This is more complicated, as you are changing your strategy, in essence.

Scenario 1 is a straight calculation; if the savings from the lower rate are higher than the penalty your lender will charge you, then you will save money and it is worth doing. Nothing else changes with your mortgage from how it is currently.

Scenario 2 requires you to not only calculate your savings, but also re-evaluate your strategy and consider other options.

Some Closing Points To Help You Decide

• If you feel mortgage rates will stay low, you could go with a variable rate mortgage, which will be at a lower rate than any available fixed term.  You’ll save money if you’re right about rates, but you are exposed to interest rate risk if you are not.  If rates go up sharply, which could happen if the economy recovers quickly and inflation becomes an issue, your savings will evaporate.
• If you feel mortgage rates are only temporarily low and are set to rise in the near term, then you could go with a fixed term mortgage with a length of your choosing. You’d be locking in a historically low rate and have no worries about that rate until you need to renew.  You could lock in for up to 10 years, if desired.
  

Tips and Closing Commentary

• Historically, a variable rate has been the cheapest option, proven by many back-tested studies.  There is speculation about this, though, that right now may different.
• You can usually avoid a penalty for breaking your mortgage if you stay with your current lender and do what is called a ‘blend and extend’.  This is where you get a better rate but must lock in for a term longer than what is left on your current mortgage. Your existing rate will be blended with currently available rates to get your new rate.  Because of the penalty, this option is often the way to go if you were planning on extending your term anyways.

Our friends at Million Dollar Journey have also chimed in on this potential opportunity and they have some great supplemental information to offer.