Mary borrowed money for mortgage purposes seven years ago.  The original term (contract period) was one year.  When the mortgage came due (in 1994), Mary went in to discuss the mortgage and its renewal with a client service officer at her local bank.

Her banker suggested she split the mortgage into three distinctive parts. Fifty percent of it should be renewed for 7 years, 25% for 1 year and the remainder (25%) into a secured line of credit.  The thought at the time, from her recollection, was long term stability for the first part, not knowing where interest rates were going; short term for the next part because the rate was cheaper; and the line of credit facility because it was fully open and she could re-borrow if she had to, without going back through the lawyer or getting her house re-appraised.

She has indeed been prepaying the line of credit part.  She has also re-borrowed against it so the net result is the status quo, she owes as much now (on this portion) as she did at the onset. She has been an avid reader of this article.  She also noted that the advertized mortgage rates on this page have been lower than her average rate.   She called me up to enquire on transferring her mortgage to another lender, at a better rate.

In my analysis of her situation, I had to advise her that notwithstanding part two of her mortgage was due for renewal, part one was not due until next year.  In order to transfer the mortgage to another lending institution without a penalty, all parts must be due at the same time.  She was very upset at the news so she went in to complain about problem with her present lender.  The loans officer took the information and called her back with some apparent good news.  They (her present lender) would "early renew" part one of her mortgage, part two was already due and part three was open, so if she wanted to put all the pieces back together, they would comply.   In hearing the news, Mary called me to express her gratitude for my time and efforts on her behalf, and she wanted to share this news with me.  I was a little skeptical so I asked her to get the banker to provide the details to me for analysis, which he did.

It turns out that Mary was being offered a new "blended rate" of 8.25% for a new five year term mortgage.  There would be no penalty to amalgamate the mortgages now.  I told Mary she was getting "the short end of the stick" and that it would be cheaper to pay the penalty since I could arrange a new mortgage at 7.10%.   On her $120,000 mortgage, my rate would save her some $1380 per year for the next five years. 

Mary went back to her banker and asked about the penalty get out of the mortgage.   Her "friendly" loans officer said she could not leave the bank, her mortgage would not allow it.  The only way to get out would be to sell the home.   Traumatized by this answer, she asked me if this was true.  I reviewed her mortgage document, and sure enough, Mary cannot leave her present lender until maturity, October 1, 2001, without paying the interest for the whole year on part one of her mortgage, some $2775.  More information came out when she returned to the bank; if she were willing to pay the penalty, the banker added that he could reduce the rate by .75%. Mary flipped when that tidbit was announced to her.  In one breath, the bank would not charge her a penalty to renew early at 8.25%, but if she were willing to pay a penalty, then the rate would diminish to 7.50%.  Was the higher rate not equivalent to a penalty?  Mary got so mad she no longer cares about the penalty, she'll pay it willingly to get out from under the rule of such a draconian lender.

Splitting a mortgage into various part can hamper the assignment of the mortgage to another lender.  Before you elect to split the parts, make sure you have purpose for doing so.