Is Paying a Penalty Worth It?

I asked myself this very question last spring when rates first dropped as low as 2.99%. It made me think, “What’s my rate? Am I paying too much for my mortgage?”. Most people lock in for their term and never think about it again until it’s time to renew because they are afraid of the penalty they would pay for breaking the mortgage. I was one of those people. If you didn’t know you had options, why would you look into it? As a newer Broker to the Mortgage Industry, I want to make sure other people are not making the same mistakes I did before I became educated!

Education is the key to saving money, so I did my research. All it took was looking on my online banking to see what my mortgage balance and my rate were and I was shocked: 4.5%? Really?! Often, when it’s your first home purchase, you may just take what they offer as you don’t know any better.

Next step was a quick email to my Financial Institution by clicking the “contact us” tab right in my online banking. One easy question, “If I were to pay off my mortgage tomorrow, what would my penalty be?”

The answer I received was $3000. That seemed like a lot of money so I left it alone and just kept thinking about that 2.99%. Rates this low aren’t going to be around forever and what will I end up with in 2 years when I do have to renew? Most people think it’s just easier to leave it alone and not bother, again, that used to be me.

I crunched some numbers and it turned out that I would save far more money if I just paid the penalty and switched my mortgage to the 2.99%. My current mortgage was $160,000 @ 4.5%, 22 years left. I’ve compared it to $160,000 @ 2.99%, 22 years left. Here’s what I discovered:

Mortgage 1

Mortgage 2

 

Mortgage amount $160,000 $160,000
Interest rate 4.500% 2.990%
Mortgage amortization 22 years 22 years
Monthly Payment $952.15 $826.32

 

Monthly payment alone was going to save me $125/month! There are a lot of other things  I could be doing with $125/month. Then I checked into the interest. With a mortgage of $160,000, here’s what I found:

 

Interest paid                   @ 4.5%                        @ 2.99%

Year 1                           $7,044.61                      $4,683.58

Year 2                           $6,845.21                      $4,525.98

Total                             $13,889.82                    $9,209.56

 

That’s a difference of $4680.26! The amount I’d save in interest would more than cover my penalty and that’s just in the first 2 years. What about the other 3 years of my term if I refinance? Rates will not be as low as they are now when renewal time comes so I will continue to save in interest for 3 years longer.

If you bought your house 3 or 4 years ago, it’s a great idea to look into it. If you find out your rate, mortgage balance and penalty on your current mortgage, I can run the numbers and see if it makes more sense to pay a penalty to break your current mortgage and lock in to these great rates now.  It will cost your nothing to check. Wouldn’t you feel better knowing that you are not paying your financial institution more money than you should be?


Naomi 1 Naomi Hamm, Mortgage Broker

 Office: (204) 727-2177

 Cell: (204) 724-7290

 Email: naomi_hamm@centum.ca