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Early Mortgage Renewal May Beat Rising Interest Rates

Posted by Sherry Rioux on October 29, 2009

I called our bank this week and talked to my favourite person there about our mortgages.  Shudder.  Shake.

I’ll tell you straight up that I’m not much of a risk taker.  I do however try to undertake thoughtful analysis in decision making especially as it applies to money.  In addition to our home, my hubby and I own some other properties with mortgages  and so, I’ve been thinking about interest rates lately.

I don’t have a crystal ball of course nor am I giving anyone else advice but, my sense is that by the time our mortgages come due next year and in 2012, interest rates will be higher.  Quite possibly, they’ll be significantly higher.  With the huge amounts of government spending and ballooning deficits, somebody is going to have to pay the freight.  Strangely, inflation is rearing its ugly head despite a sluggish recovery.  Oil prices are poised to climb.  All of this adds up to rising interest rates in my mind.  Besides, the experts say they’ll head up after the Bank of Canada’s rate hold promise ends next June.  So, what to do, what to do?

On our home mortgage, we have a decent enough existing interest rate of 4.99% but, it’s coming due next October.  That’s the part that I don’t like.  It’s too early to book an early renewal (many banks allow as much as six months with a rate guarantee) and, it doesn’t make sense to pay a penalty to break the mortgage just so we can take a whole new one.  So, here’s what we’ve done.

We have extended, blended and renewed all of our mortgages for five years. The bank applies the rate we’ve been paying all along to the balance of the existing term and then, they apply the current interest rate, which is lower, to the remainder of the five years beyond the current term.  They blend the rates and voila, we’ve just locked in our mortgages for 5 more years for under 4.5% with no penalties.  We could have run a variable rate which often works out well but, as I said before, I’m not much of a risk taker.

5 thoughts on “Early Mortgage Renewal May Beat Rising Interest Rates

  • on January 6, 2011

    May I ask which lending institution you are using? Most Canadian banks want to charge a penalty for an early renewal that is more than 120 days in advance of the maturity date. The penalty is the same as simply breaking the mortgage to switch lenders. The banks don’t seem to appreciate that blending and extending is in their best interest, as it retains a client’s business beyond the initial term.

  • Marg
    on January 6, 2011

    Thanks for dropping by the blog Rebecca and for your comment.
    The scenario I’ve described in this post is a blend and extend – it is not breaking the mortgage contract. Most of the Canadians lenders do in fact offer this option without penalty since they get the full value of the original mortgage plus an extended commitment from the customer so it is in their interest to do so. Some may apply an administrative fee. I know that blend and extend is offered by all the major lenders I have spoken to so I’m curious why you are getting different results. I’d love to compare notes so please feel free to comment further or to shoot me an email.

  • on January 6, 2011

    I have looked into blending and extending with 3 of the big banks, and each of them treat it as breaking the mortgage contract. The penalty can be paid upfront, added to the principal, or built into the new interest rate.

    Interestingly, when speaking to some of their mortgage specialists about “blending and extending”, their only understanding of the term is “to blend the IRD/3-month penalty into the interest rate of the new mortgage”. This is quite a bit different than the traditional definition of “taking a weighted average of the old and new interest rates”.

    When you made your inquiries, was it clear that they would blend and extend without incorporating the penalty into the new rate? Was it a case of managerial discretion that eliminated the penalty?

  • Marg
    on January 8, 2011

    On Friday, I contacted both local branches here of TD and Scotiabank. They do not charge a penalty to increase and blend. I’m very curious as to why we are getting different answers.

  • Marg
    on January 10, 2011

    Hi Rebecca. I now have, in writing from both TD and Scotiabank that they do not charge a penalty in a blend and extend scenario UNLESS it is a variable rate mortgage which makes sense. I also confirmed with a mortgage broker that it would be unusual to see a fixed rate mortgage extend and blend attract any penalty. If you have come across a different situation, it may be worth asking for their policy in writing on this subject. Hope this helps you.

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