Mortgage Talk: Low Interest Rates and the Current Real Estate Market

December 2009


Record-low borrowing costs combined with the growing realization that the economic storm is passing have fuelled the remarkable recovery of the real estate market in Canada. However, it is important to understand some of the issues that have surfaced with these exceptionally low interest rates.

If you are obtaining a mortgage, you are fortunate to be obtaining some truly historically low interest rates. The decision between taking a variable rate mortgage versus a fixed rate mortgage should be evaluated with your mortgage consultant and/or your realtor to assess the pros and cons of each option. Although rates are exceptionally low, lenders are definitely exercising more caution with their lending policies.

If you are thinking of refinancing your current mortgage, you need to consider the cost of breaking your existing mortgage compared to how much you will save in interest payments.

If you break an existing mortgage you will have to pay the greater of three month's interest or the interest rate differential (IRD). An IRD is a penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. Usually this is calculated as the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term.

If for example a borrower is currently paying 6.0% interest on their home mortgage and the current rate is 3.5% the difference (6.0% - 3.5%) is 2.5%. This 2.5% will be charged for the months remaining on your mortgage. If you are carrying a $400,000 mortgage at 6.0% your monthly payment is approximately $2,559. If the current rates are 3.5% the payments would be $1,997, the difference being $562.00/month. If you have 48 months remaining on your mortgage, the penalty would be $26,976 ($562 x 48).

These numbers are astonishing and the lenders unfortunately are not easing up on these charges. It may only make sense to refinance your mortgage if the interest rate savings over the remaining life of your mortgage exceed the value of the IRD.

If you are selling your home make sure to know what your mortgage discharge penalty will be for breaking your mortgage prematurely (assuming you are not porting your mortgage).

Of course, if you port (transfer) your mortgage to another property, you will only be penalized on the portion of the mortgage you discharged. For example, if you had a $400,000 mortgage and were carrying a $300,000 mortgage over to your new home, the penalty would only be assessed on the $100,000 mortgage you discharged.

Although the market is changing and will continue to do so, this represents opportunities for buyers and sellers alike. It is extremely important to be informed as a consumer so that you can make good, sound educated choices during these most interesting of times. And please make sure you know in advance what all your closing/transactional costs will be before you enter into any agreement of purchase or sale.