Should You Refinance Your Mortgage at Lower Rates? A Little Research and a Couple Questions Should Save Canadians Thousands of Dollars.

The CBC and other news media outlets have been heavily publicizing Canada's historically low mortgage rates. This highlights that fact that many home-owners and real estate investors need to seriously consider whether or not they should refinance their current mortgage. How does someone know if they should cancel their existing mortgage and obtain a new one at a lower rate?

• A little research and simple mathematics. Ask your current lender how much it would cost to pay off your mortgage early. Generally it will be one of two amounts:

1. Three months mortgage interest.
2. The "Interest-Rate-Differential," or IRD.

Three months interest is a simple calculation, but the IRD can be a little more nebulous. It depends primarily on two factors: how many months are remaining on your existing mortgage, and the rate difference between the current lenders rate that you have, and what their current posted rate is. If they would make more money off you than a new customer, they will penalize you accordingly. To get the most reliable amount for a penalty, the lender's head office or mortgage servicing department is best. The representative at the local branch can often be less forthcoming.

• Next you need to take the cost of the penalty, and decide if it is less than the total amount of money saved from obtaining a better interest rate at a different institution. For example, if your current penalty is $2000, but you would save $200 per month for the next 5 years ($200 x 60), or $12,000, if you moved to another lender, financially you would clearly be better off paying the penalty and savings $200 per month. 

It is important to keep a close eye on your finances and ask the important questions to ensure that you are not being taken advantage of as a consumer. So please, question your lender. Ask what your penalty is and see if it would be better for you to move somewhere else. A vibrant and competitive marketplace can only exist with informed customers.