Beware of early mortgage renewal blend and extend offers

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On the weekend I was asked to analyze a bank "early renewal blend and extend" offer.

The mortgage information, as it was, follows:

Balance= $165,428.87, current rate= 5.1% with 19 months left, $1065.87 monthly payment.

OBJECTIVE: Save money, and be protected from potential higher rates!

What the bank offered:

  1. No approximate penalty of $6,800 for breaking the existing contract
  2. 4.99% rate (under the 5.39% posted rate for five year fixed)
  3. keep the same payment because the objective is to save money

What is the five year result of this proposition?    a mortgage balance in five years of $139,286.91.

Is there a way to save more money and have five year rate protection?

RESULT:

  1. The bank first quoted an approximate penalty using simple interest instead of mortgage math. The actual penalty would be 5.5% less, or $6,432.57 using mortgage math.  Banks often use this as a bargaining tool, offering to reduce the penalty to mortgage math levels if you stay with them.  They have to use mortgage math regardless if you pay them out with someone else's money.   If you add the penalty, you will start with a higher balance of $171,861.44.
  2. 3.79% rate
  3. keep the same payment because the objective is to save money.

What is the result of this proposition?  a mortgage balance in five years of $137.112.58.  Even though you added the penalty to your starting balance at the beginning of five years, you still have a $2,174.33 LOWER mortgage balance.

You have made a better decision to save money and protect yourself from potential higher interest rates.

For a personal review of your bank's early renewal "blend and extend" offer:  info@askphil.ca.

The information needed?   Your balance, current rate and remaining term, your payments.  If the bank has made and offer, the rate and term offered, and payment.  Have they quoted a payout penalty(s): one to stay with them, another if you leave them- those amounts?