One such resource is the online mortgage calculator. These calculators generally explain two things about your mortgage if you refinance. Firstly, how much you will save over the life of your mortgage, and secondly, how much you will save monthly.

One such calculator appeared on three different sites that claimed you could save over $78,0000 in interest on your $300,000 mortgage if you refinanced it from 6% to 4.25%. The payments were actually lowered by $283 a month.  This appears to be an incredible savings until you look at all of the facts. A closer look will reveal that these calculators are very misleading.  The calculator on all three sites asks you to input the penalty amount and closing costs that will be incurred when refinancing. Two of the sites go on to explain that these numbers are not used in the calculations and one fails to mention this fact completely.

When you sign your mortgage it is a contract for the term you select.  The lender expects to get that rate of interest from you during the entire term.  If you break the contract before the end of the term the bank will penalize you for any interest that they have lost. The greater of the Interest Rate Differential or three months interest is generally charged when you break your mortgage contract.  The IRD is normally calculated by determining the difference between a lender’s posted rate at the time your mortgage was signed, and the lender’s posted rate for a term closest to the time remaining in your term.  Lenders charge this penalty to ensure they are not losing money if you refinance your mortgage before the end of your term.  Although this IRD calculation is common practice among lenders polices do vary.  You should always contact your lender to get an exact penalty amount.

Another flaw with these online calculators and the numbers they project is that they are basing your interest saved on the full amortization of the mortgage.  This is deceptive. In the example used above, you will still need to renegotiate your current 6% mortgage at the end of its  term, just like you will still need to renegotiate the new 4.25% mortgage at the end of its term.  These calculators assume that you will always renew at the same rate which is highly improbable.  You will not save money refinancing your mortgage this way.  If you have a need to lower your monthly mortgage payment you can do so by refinancing, but you will not come out ahead.  You would be far better off consolidating your high interest debt during the refinancing of your mortgage.  It is then possible to substantially lower your total cost of borrowing.

If you have equity in your home refinancing to pay off high interest debt could very well save you thousands of dollars. There are also plenty of advertisements showing that consolidating your debts can save you a great deal of money every month.  Sounds like a good idea, right?  Not so fast.  Ensure your banker, or broker is fully explaining the savings found by refinancing.  Work with a mortgage professional who can analyze your debt and take the current balances, interest rates and payments of all of your debts and project what your total debt will be in 3 or 5 years with your current mortgage.  Compare this to refinancing and paying off all of your high interest debt.  There are four options to look at:

1.  Increase your monthly cash flow by having your current projected balance and your refinance balance the same after a 3 or 5 year term  This will leave you with the same amount of debt, but a lower monthly payment.

2.  Lower your total debt by keeping your monthly payment commitment the same with your mortgage and all other debt payments included.  This will not free up any cash on a monthly basis but your interest savings at the end of your 3 or 5 year term will be significant.

3.  A combination of increasing your monthly cash flow and reduction of the total amount owed at the end of the 5 year term.  This will provide some instant gratification with lower monthly payments while reducing the total amount owed at the end of your term.

4.  Extending your amortization period to the maximum 35 years to lower your monthly payment as much as possible.  This should only be done when lower monthly payments are absolutely necessary as the interest costs will be significant.

Everyone has unique financial situations, short term and long term goals.  Find a mortgage professional that you are comfortable with and fully explain your short term and long term goals.  Your mortgage professional will be able to fully explain the outcome of refinancing your mortgage and find a mortgage that meets all of your needs.  If you do not fully understand how your mortgage professional is arriving at any amounts ask him or her to explain in detail.  If you still do not understand, ask again.  Hopefully they are not using an online calculator.

Saving money by changing lenders was a perk, but not the reason we chose to move our mortgage to National Bank.  National Bank has an All in One Product that we felt would better suit our needs and save us some interest costs.  I rarely recommend products on my blog, but this one impressed us so much that I believe it is worth mentioning.

In the next couple of weeks I will show you how we intend on saving money using this product and how you may be able to as well.  Due to the structure of the account I am also going to have to change the way I track our Mortgage Pay Off Progress.  I am bouncing a couple of things around, but I have not decided exactly how I will track this.  I may add a line for Net Worth to the mix.  I have updated it to reflect the new mortgage amount and interest paid.  To properly reflect the cost of the switch I have included the penalty and the legal fees into the interest costs.  These number will change quite a bit by June or July when we consolidate some accounts and no longer have money idly sitting around.

Original Balance:  $316,000.00 (Jul 2008)

Current Balance:  $238,836.86 (May 2010)

Total Payments:  $108,907.77

Total Interest:  $31,137.38

Projected Interest Saved:  $270K +

When you are first buying a home it is very exciting and very stressful. You will deal with your mortgage rep and lawyer and you will likely run into things that you don’t quite understand. Ensure that you ask questions and have things explained to you until you do understand. Some common questions would be:

• Is the mortgage portable and assumable?
• What are the exact prepayment privileges?  When can prepayments be made and how much?
• Can the mortgage contract be broken without selling the property?
• What is the penalty if the mortgage contract is broken and how is it calculated?
• Can you increase the payment amount and the payment frequency?
• If you are in a variable rate mortgage and want to lock in, what fixed rate do you receive?  Posted less a certain percentage, or is it negotiated?
• If I take a cash back mortgage does the penalty increase and by how much?
• If you accept mortgage life and disability insurance can it be canceled at any time?

Ensure that you ask questions as not asking may cost you in the long run.  Be wary of mortgages with very low rates.  Many are “Value” or “No Frills” mortgages which offer little or no prepayments and you may not be able to break the mortgage contract unless you sell your property.  These mortgages can be very restrictive.

I am still working on my ebook, The Mortgage Reduction Guide which will be a little more specific with some questions that may end up saving you hundreds, or thousands of dollars on your mortgage.  Make sure you ask for ask for a real pony or be left disappointed and possibly with less cash in your pocket!  I love that commercial.

My spouse can buy back some of her pension. Retiring earlier is very inviting. I will continue to keep my RRSPs topped up and my spouse will contribute to a spousal RRSP as we prepare for me to move to 100% self employment in the future. We may even look at TFSAs. Unfortunately the prepayment privileges are a little restrictive compared to my original mortgage. A 10% lump some and up to double every payment will not allow me to fully pay off the mortgage by the end of the 3 year term. If we are ever in a position where we are having money idly sitting around we will discuss ways to use it. At the end of the term we will not have a fixed component to our All in One product and should be able to pay off the balance in a few months.

If you have ever Googled anything like, “pay off your mortgage sooner” or “save money on your mortgage” you have likely come across mortgage acceleration programs or money merge accounts. The premise of most of these systems is that you never have money idling sitting in a chequing or savings account. Your money is always offsetting interest on your debt. This is what we are going to do, but I will pass on any pricey software. This will work to our advantage because at any given time we have between $9,000 – $15,000 sitting in our bank accounts waiting to pay expenses. Our plan is to keep our line of credit with a balance of about $20,000 while the rate is under our mortgage portion interest rate. When prime goes up and our line of credit interest is higher than our mortgage interest we will keep our line of credit balance right around $0.

Switching to National Bank’s All in One product will save us on interest costs and give us the flexibility with our debt and finances. I am looking forward to it.

The GDS is the maximum percentage of your gross income that is allocated to paying the costs of carrying your home. This ratio includes your principal and interest mortgage payment, property taxes, heating and/or condo fees. To qualify your monthly carrying costs cannot exceed 32% of your gross monthly income.

The TDS is the maximum percentage of your gross income that can be used to pay your GDS plus all other debts. This ratio includes everything from the GDS as well as any other loans, credit cards or lines of credit. To qualify it cannot exceed 40% of your gross monthly income.

I want to mention that these are guidelines only and those with good history of managing their credit are allowed to go as high at 44% TDS without considering GDS at all. Yes, if people are not carrying any other debt and have no other monthly obligations their housing costs can eat up 44% of their gross income. This is somewhat scary as someone wanting a $400K mortgage could qualify making just under $60K per year. If you want to read further click here for the CMHC Quick Reference Guide.

I take the attitude that if CMHC uses 44% at the maximum TDS then that is what we should attempt to achieve. For 2009 our TDS was 41%. Not bad, but why were we unable to achieve 44%? $5523 represents that 3% of our income that we did not use for housing costs. This means that we were short approximately $460 per month for mortgage payments. Could we have found that money? Of course we could have. Cut gym memberships, cut donations, cut eating out, cut new computer, cut new theater seating, cut vacations and take advantage of public transit more often. Making up this $460 per month would be very easy for us.

Although achievable, I don’t see cutting those “luxuries” as an option. We are making great progress paying down the mortgage and as long as we are able to stay on track we are not going to change our lifestyle.

I want to note that we are at 41% by choice. Although with our regular mortgage payment and prepayment averaged just over $5,900 per month we are not locked into this payment and we have no other monthly obligations. There would be considerable stress if we were locked into those payments.

When considering your mortgage options ensure that you are not over extending yourself.

For example if the maximum amount you qualify for with a 3 year rate of 3.49% is $350K you will now only qualify for $273,674 because you have to qualify at the 5 year posted rate of 5.39%. Your interest rate will still be 3.49% but you qualify for over 20% less of a mortgage because of the new rules.

How will this effect you? What do you think it will do to real estate prices in general?

Q. I have a pension. Do I need an RRSP too?

A. For most people the answer is yes – although if you have a good pension at work you can certainly contribute less to your RRSP than someone without one. With no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement income through your pension at work.

There is one group that doesn’t need RRSPs at all: government workers. Teachers, police officers and other civil servants have among the best pension plans available and won’t need help from RRSPs to retire comfortably. For instance a couple who are both government workers can expect to enjoy a combined annual pension income of at least $50,000 with is roughly the kind of income that a million dollar portfolio would generate

Q Which should I contribute to first: my mortgage or my RRSP?

A. Financial planners have debated it for years, but from a pure dollars-and-cents perspective the correct answer is usually to pay your mortgage down first. Every time you make an extra mortgage payment you reduce the amount owed on the principal. If you mortgage interest rate is 5%, paying it off faster is like getting a guaranteed 5% return. yes, you can get a better return than that in the stock market (if you’re lucky), but it’s no guaranteed. So unless you can find GICs that pay 5% you may want to attack the mortgage first.

I want to add a couple of comments to these points. If you are carrying a balance on any high interest debts such as credit cards or loans you are better off paying them before your RRSP and mortgage. Those who are involved in a group RRSP plan where your employer matches your contributions should contribute to these plans before making additional mortgage payments.

What do you plan to do this year, pay down your mortgage or contribute to your RRSP?

If you have a question about the $$$ savings you may experience by refinancing your mortgage for a lower rate, consolidating debt or are comparing different offers from lenders please feel free to email me at mortgagemath@debtfreeby43.com . You will receive a reply within 48 hours.  Your email address will only be used to reply to your question and will not be added to any mailing lists now or in the future!

I have set up this email address to send an auto response that will include a link to make a donation to Debt Free by 43.  Although a donation is required to have your question answered there is no minimum donation.  Simply donate what you feel an answer to your question is worth.  It is that easy!

I won’t get rich, but it is my hope that I can generate  some cash every month to take my better half out for a nice dinner.  That may decrease the number of times she refers to herself as an “Excel widow.”  I do love working with the numbers.  If you need some help please feel free to email me at the address above.  I appreciate your continued support.

The CAAMP current Annual State of the Residential Mortgage Market in Canada report shows that 88% of consumers renew their mortgages with their current bank. Let’s look at this from a business perspective.

You are the CEO and you know there is an 88% chance that your customer will renew with you so you send out a renewal letter with your 5 year posted rate on it at 5.49% A small percentage of your customers accept this rate without question and you have just locked in some huge profits.

A greater percentage of your customers call and ask why they were not offered the special rate of 4.19% advertised on your website. Your customer service representative’s simple response is, “Those rates are for new customers, but I can also offer it to you.” Your customer accepts that response and is happy with their rate. You have still not given your customer the best rate you can, but have locked in some more profit.

A few of your customers will still not be satisfied and will call and state that they have seen the rate of 3.99% offered on many mortgage brokers’ web pages. You may or may not meet this rate for various reasons.

Let’s look at the effect of this on your customers based on renewing a $200,000 mortgage with a 20 year amortization period. The following are the rates, monthly payments and the outstanding balance after your new 5 year term.

Rate: 5.49% Monthly PMT: $1542.52 Balance: $222,936

Rate: 4.19% Monthly PMT: $1340.93 Balance: $218,349

Rate: 3.99% Monthly PMT: $1313.70 Balance: $217,597

Of the 88% that renew with you 15% accept the posted rate, 60% are happy with your current special rate and 13% push for the rate they have found posted elsewhere. You have still retained 88% of your customers and compared to the rate of 3.99% that you could have offered all of your customers you have locked an average profit of over $5,000 per mortgage over 5 years. Multiply that by  750,000 customers and you have some big profits making shareholders very happy.

What are your experiences with mortgage renewals?

Disclaimer:  The rates compared are hypothetical but reasonable based on current rates posted on the internet.  The writer’s opinion is not necessarily the opinion of a bank’s CEO or any other bank employee.

Currently one of the big banks has a special 5 year rate of 4.44% available. That is a full quarter of a percentage over what can easily be found on any mortgage broker’s website. Let’s compare renewing a $250K mortgage taking the banks initial offer to getting 4.19% elsewhere. The numbers are based on a remaining amortization period of 25 years at 4.44% I will be adjusting the amortization period on the mortgage with the rate of 4.19% to ensure monthly are the same.

4.44% over 5 years – Monthly Payments: $1375.36 Balance at the end of the 5 year term: $219,272

4.19% over 5 years – Monthly Payments: $1375.36 Balance at the end of the 5 year term: $216,058

It will cost you $3,215 if you just sign your renewal without asking for a better rate or moving your mortgage. Make that phone call or shop around. You may find that there are no fees involved when you move your mortgage or refinance at the end of your term. Take advantage of this and consolidate your debt at this time, you will save money.

Canada’s outstanding mortgage debt at the end of year in 2007 was $821.4 billion. If this rate differential is applied to the entire mortgage debt the difference is just over $2 billion a year. This is money out of the hand’s of Canadian families and into the hands of lenders.

Simply incredible!