This article should be construed as the framework for decision making when it comes to refinancing your present mortgage before maturity. Two of my Clients this week fell victim to the practice of blending rates, to their detriment.

John and Sylvestre own a home. They have owned it for three years (as of July 1, 1999). Their present mortgage of $142,000 was written at 9.5% for a five year term. They bought the unit for $165,000. Lately, Sylvestre was downsized at his job but offered a new position with a rather large salary reduction. They now find it difficult to make ends meet. They approached their present lender with their quandary. Ideally, they would like to re-write their mortgage at today’s rates. The lending officer punched in the information on his desktop computer and announced to them that the penalty to clear off the mortgage (to start over) would be $8378. Their mortgage early payout clause called for the greater of: a three month interest penalty or the interest differential between the rate on the mortgage and the present day rate for the remaining term (6.55% for two years). Obviously, they did not have $8378! The banker also offered a rate blend of 7.65% for a new 5 year term. This would lower the payments by $165.00 per month. They thought that was a good deal but they wanted to check with me first, before signing.

I looked at their mortgage charge and noticed that the original papers said this was a CMHC insured mortgage. There is a clause in all CMHC insured five year term mortgages that states that after the third anniversary, the lender cannot charge more than a 3 month interest penalty to clear the mortgage. Their penalty on July 1, 1999 will only be $3300, as opposed to $8378. If they have the money to pay the penalty on their own, I could get them a new 5 year term mortgage at 5.95% (with savings of over $300/mo), and if they could not get the money on their own, I could find a new lender to pay the penalty and offer them a new 5 year term mortgage at 6.70% (with savings of $243/mo). The lending officer was not trying to cheat them, he was simply reading the results of the computer printout. I needn’t tell you they decided to wait until July 1, 1999.

Another situation with the same theme occurred when Mary wanted to sell her present place and take the mortgage with her (instead of paying the interest differential) to her new residence. She had chosen a ten year term at 8.50% on August 1, 1994. She still owed $100,000 on her old mortgage, and she would need an additional $60,000 (for a total new mortgage of $160,000) for her new purchase. Her lending officer (at a major Trust company) told her that the penalty to break the original mortgage was $7700, but offered her some advice. He said: "take the old mortgage with you to the new house (being purchased on August 1, 1999) and we’ll blend the old mortgage at the old mortgage rate with the new $60,000 at a discounted rate (6.45%) to average out at 7.5% for the new mortgage for a new five year term. There would be no penalty that way!"?????

The Interest Act controls mortgages in this country. After five years on a ten year term, any residential mortgage can be paid off with a three month interest penalty, even though it may not spell it out in the paperwork. After consulting with me, on August 1, 1999, Mary is moving into her new residence with a $162,000 mortgage (that’s the original $160,000 she required plus $2000 to pay the penalty on the old mortgage) at a 5 year rate of 5.95%. Her overall monthly savings will be $140 with a new lending institution. Mary’s present mortgage officer did not know about the Interest Act guidelines.