Renegotiating your mortgage agreement

It’s a familiar story. You buy a house and lock into an interest rate for a five-year mortgage term. Then something changes in your life midway through the term and the current mortgage doesn’t meet your needs. Or mortgage rates have gone down substantially and you would like some interest rate relief, so you consider renegotiating the mortgage agreement. However, there will be a cost and that cost will most likely determine whether you renegotiate or not.

The first step is to decide what your new needs are. Do you have to move because you’ve been transferred? Do you simply want to renegotiate to get a lower interest rate to ease your monthly payment? Do you need to make some significant home improvements? Have you accumulated debt and would like to consolidate? 

If you opted for a variable rate mortgage, the prepayment penalty may be the least costly. If, however, you opted for a fixed rate, the calculation is a bit more complicated. And different lenders offer different terms and conditions.

Here’s how it works. There are two types of mortgages – fixed and variable-rate mortgages.  For the most part, variable-rate mortgage charges are three months interest. Fixed-rate mortgages have different rules. They use the interest rate differential. Different lenders have different ways of making this calculation but basically it’s the lost interes,t calculated at the current contract rate, minus the market rate at the time the penalty is calculated, for the remaining term.

If at the time of the calculation, the market rate is higher than your contracted rate, then the lender will only charge three months interest penalty. After all, the lender stands to make more money at the higher rate.  However, if the rate is lower, then you get hit with the rate difference.

Some lenders are pretty clear with their calculations, others however are not.  You’ve no doubt heard about penalty fees in the thousands of dollars. Here’s how that happens. Let’s say you have a contracted five-year rate at 2.99% but you want to break it in the second year.  Some lenders won’t use that rate to calculate the differential but will use their posted rate, which is substantially higher.  A posted rate of 5.14 per cent, for example, would create an interest differential of 2.15 per cent. If your mortgage is in the $300,000 range, then the penalty will be in the $10,000 range. That’s a hefty sum.

There are also options to help reduce those prepayment charges. Many mortgage agreements allow you to prepay a certain amount without triggering a charge. You might consider prepaying a portion of the mortgage before renegotiating so your charge is calculated on the balance. But beware; some lenders have rules on how close to the date of renegotiation you can make those prepayments.

If you’re renegotiating because you’re moving, you can avoid prepayment charges by porting the mortgage, which means you take your existing interest rate, terms and conditions to your new home.

If you’re renegotiating to take advantage of lower interest rates, some lenders will allow you to blend- and-extend the mortgage until the end of the term. Your old interest rate gets blended with the new term’s rate. You will probably get charged an administration fee.

There may be benefits over the long term to renegotiating your existing mortgage if it fits with your overall financial goals. It’s always a good idea to get advice from a mortgage broker who can offer options and solutions.

Insights from the poker table

By Mark Kerzner, President, TMG The Mortgage Group Inc.

After writing a series of blog posts on interest rates, credit guidelines and the mortgage industry, I ventured out a while ago and shared my personal experience as a hockey coach (http://blogger.mortgagegroup.com/2013/05/business-lessons-i-learned-as-hockey.html). I appreciate the feedback I received and was encouraged to post again of a more personal nature. As always I welcome your feedback and comments.

I have long since been a fan of poker. A number of years ago I became a part-time student of the game, Texas Hold-Em, to be specific. I like the combination of playing the cards I was dealt and playing my opponents at the table. I liked the strategy and the math – calculating both my odds as well as pot odds, which is simply the amount that I would have to bet divided by the amount that was already in the pot. At that point I decide if my pot odds are worth it with respect to my odds of winning a hand. I like the thinking, the interaction and the winning --though that part has been few and far between. 

How many times have we all heard sayings like "life is too short" or “you have to live for the moment"? After years of having, and finding, excuses I finally decided to go "to the show" and play in one of the World Series of Poker (WSOP) bracelet events.  I have played some small tournaments and regular games with friends but I always wanted to play in a WSOP event.

The World Series of Poker along with World Poker Tour (WPT) are probably the best known tournament events. The WSOP Main Event takes place each year and has more than 8,000 participants putting in $10,000 each. The event I played in was NOT the main event but it was a bracelet event nonetheless. There were approximately 2,300 participants in the event I played in. The winner, Chris Dombrowski won $346,332 for his efforts. 

Sure, the money involved in winning would have been great, but truthfully, I wanted to play for the experience. I wanted the opportunity to sit in a tournament with thousands of other would-be poker hopefuls trying my luck at the tables with both amateurs and professionals alike.

Over the past ten years or so, poker has become much more mainstream. We’ve had the opportunity to watch the game being played on television and we get to peak at the hole cards.  We’ve become familiar with names such as Negreanu, Brunson, Hellmuth, and Esfandiari. As amateurs we have the opportunity to play with these pros. Other than an occasional golf pro-am I can't think of many other sports (ok, insert laughter here … poker is a sport?) where a casual player gets to play alongside a professional with a chance, albeit very slight, at a great run. Simply put, I had that opportunity and I had to take it.

In the end I was pleased with my play though I was knocked out on my third all-in mid-way through Day 1 with what some people are telling me was only a marginal hand --pocket 10s, short stacked, fifth to act, and one raiser ahead of me. More than that, I loved the experience. I will return, but I will also keep my day job.

 Speaking of my day job, similar to my poker play, I often look for insights for how I can keep improving. When the cards are not coming your way there is an opportunity to practice patience. There are also opportunities to “make your own luck.”  As with poker there are ups and downs in our industry with rates and guideline changes and lenders entering and leaving the marketplace. It is vital to stay focussed. Sometimes when others are becoming more passive there is actually an opportunity to act and invest.

That’s why I am so passionate about mortgage brokers and the mortgage industry. Regardless of the hands they are dealt with respect to credit guidelines, mortgage restrictions, and intense competition from bank branches, they are steadfast in their direction, ensuring that the best interests of the clients are handled first.