With mortgage rates being at an all time low, many people are wondering if it's a good idea to go back to their banks and adjust their current mortgage rate.
However, if you had locked yourself in at a fixed mortgage rate prior to when the market collapsed, and are now considering breaking your fixed term for a lower mortgage rate, you must realize that you may have a hefty penalty to pay.
Some mortgage contracts will ask that you pay a three month interest penalty or "interest rate differential" if you want to adjust the rate of your mortgage. That means you have to pay the bank the difference between your higher mortgage rate and today's lower rate times what you owe -- times the remaining years on your mortgage.
(Your rate minus today's rate times what you owe times years left)
For example, if your mortgage rate is six per cent and today's rate is four per cent, that two per cent difference is multiplied by what you owe -- say $300,000 times the number of years remaining. Say that was four years you'd be left with a penalty of $24,000.
(6 % minus 4% = 2% times $300,000 times four years = $24,000 penalty)
This can add up to a lot in penalty. For some, it can be a full year's worth of interest on the principle.
So before you make the switch, consider the amount of penalty you'll have to pay. Ask your banker to fully disclose this information to you. Alternatively, there are many penalty calculators online at your disposal.
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