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Interest rates across Canada are gradually creeping up, but they're still incredibly low compared to when I started my 5.79% fixed rate mortgage a few years ago. Several lenders still seem to be offering rates in the low-mid 3% range, which is almost 50% less than what I'm bleeding away today.

Of course, being a fixed-rate mortgage, my present loan is structured specifically so that I can't just roll it over to a new, lower-interest mortgage; penalties seem to be calculated using the IRD, which means that whatever I would be saving with the lower interest rate - that's exactly what I have to cough up in termination fees.

My bank is willing to "blend" the rates if I extend for another 5-year term, but having nearly 3 years left in the current term makes for a rather pathetic savings - the bank even admitted that it probably wouldn't be worth my while.

So my question is, is there anything I can do to take advantage of today's lower interest rates without going significantly deeper into debt? Any clever loopholes, low-risk investment strategies, that sort of thing?

Or do I basically just have to suck it up, and consider it a harsh lesson about the dangers of long-term, fixed-rate loans?

  • So, you only have 3 years left on your mortgage? There is no way I'd almost triple the length of time to have the mortgage paid off to save about 3% interest. With only 3 years left, it doesn't seem like it would make any sense to refinance. – firedfly Aug 7 '10 at 0:51
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    I think the 3 years he's referring to are in his current term, not the entire mortgage. In Canada we typically negotiate our mortgages on 3, 5, 10 year terms, etc. So in 3 years he would be up for renewal, not necessarily paid off. – Chris W. Rea Aug 7 '10 at 1:41
  • @firedfly: Chris is correct, I did say the term, not the entire mortgage. It's a 25-year mortgage but I don't think that really matters - once the term is over, I can do whatever I want. – Aaronaught Aug 7 '10 at 15:34
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    So the rate is not fixed for the entire 25 years? That's the way it is in the states. That may be why my answer was voted down. I have 4.875%, but that will be set until the year 2040. I can continue to pay that low interest rate almost forever. – mbhunter Aug 7 '10 at 18:14
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    @mbhunter: The rate is fixed for the term - 5 years - and the interest is amortized over a period of 25 years. At the end of the term I still owe them money, but I have the option to either renew for another term (at whatever the new rate is) or simply pay it off (i.e. with an equivalent loan from another bank). – Aaronaught Aug 8 '10 at 13:51
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There are many ways to describe long-term, fixed-rate loans--dangerous isn't one of them. If you've already done the math, and the savings get wiped out by early-termination fees, and the bank has already said it wouldn't be worth your while to make this change, it seems quite clear you should stand pat.

The difference in interest seems like a small price to pay for knowing that your cost of housing is going to remain constant, regardless of the current economic climate.

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If the terms of your agreement allow you to pay off any portion early (e.g. many "fixed" mortgage agreements allow for a payment of 20% of the outstanding principal, on top of regular monthly payments), you could obtain a second mortgage for as much as you can pay off, and use it to pay down the first. Then you will at least have a portion of your mortgage at a lower interest rate.

  • I thought of this too, but sadly, the banks were one step ahead of me. I can pay down the principal, but the terms of the contract state that this will not lower my monthly payment. So this actually would involve taking on a significantly higher annuity, and probably more than I could reasonably handle. – Aaronaught Aug 26 '10 at 23:07
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    It doesn't necessarily matter than it won't lower the monthly payment - in fact that may be to your advantage. As long as any payments go to paying down principal, you are still reducing the amount of interest being charged. However that's assuming you can afford the unchanged payments AND any payments on the second mortgage. – DJClayworth Mar 10 '11 at 22:19
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Unless Canadian rates are much lower than US rates, 5.79% isn't bad at all for fixed-rate. Don't worry. If the Canadian dollar is being devalued like the US dollar is, then your fixed-rate payment will "feel" less over time.

  • It's bad compared to 3.5% - that I know for sure! Can you explain why devaluation of the dollar would have an effect on the mortgage? – Aaronaught Aug 7 '10 at 15:39
  • If you can get a fixed-rate mortgage at 3.5%, jump on it. That's incredibly cheap. If it's not fixed-rate, then it's a bad deal because you're taking on the interest-rate risk. 3.5% fixed rate mortgages are lower than we see in the states. If the dollar is worth 20% less in ten years, then your fixed payment will feel less because $1000 (say) will buy less in ten years than it will now. But hopefully you'll be earning more in 10 years just because of cost of living adjustments. – mbhunter Aug 7 '10 at 18:12
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    Ah, yes, now I understand why we needed the [canada] tag. I didn't know that they actually had 30-year terms in the USA; we have 25-year amortization periods but the term itself is only 5 years, after which you either renew or cancel. Come to think of it, that kind of puts the whole subprime mess into perspective - imagine locking in 2.5% for 30 years! Anyway, believe me, I would love to snag the 3.5%, but I can't cancel in the middle of my current fixed-rate term without huge penalties and I don't wish to go another $200k in debt at this point. – Aaronaught Aug 8 '10 at 13:47
  • sorry, you're incorrect on a number of points. See the prevailing rates here: rbcroyalbank.com/products/mortgages/view_rates.html. It's quite unusual in Canada to obtain a mortgage term longer than 5 years; some banks offer them, but the rates are very high. – Ether Aug 14 '10 at 15:12
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What does your mortgage company do if you decide to sell? Will they let you pay it off without penalty then?

You could create a corporation (owned by you) sell it to the corporation, then rent it from yourself. Seems like a lot of trouble to go through though (although it might be worth it)

  • That is a very good question. I have a feeling that any cancellation (including sale) invokes the same cancellation fees, but I will definitely check. – Aaronaught Aug 8 '10 at 13:48
  • @Aaronaught: At RBC, at least, you have the option of paying off the mortgage early (with all the associated penalties), transferring the mortgage to your new house at the old interest rate and terms, or transferring the mortgage to whomever buys your house (again at the existing rate). So selling the house isn't really a way to get lower interest rates. – Eclipse Aug 14 '10 at 15:40

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