Mortgage Renewal Coming up - Advice

[james t kirk]

Ok, so my existing mortgage is coming up for renewal in 120 days and I received and email from RBC today....

My mortgage is contained within a homeline plane which is also my line of credit.

Long story short.

My existing mortgage is a 4 years closed at 4.25%

My Line of Credit is Prime + 0.00. Currently prime is 2.5%

The balance on my LOC is currently more than my mortgage due to some renovations, and my mortgage will be paid off in 40 months anyway.

Options?????

1. Roll the mortgage into the LOC and pay Prime +0.00

2. Renew the mortgage with another 4 years closed at 4.09% (Special offer currently at RBC till April 30'th.)

3. Blend and extend - Add some of the balance of my LOC to a closed 4 year mortgage because the closed rates are attractive at this point. Keep the rest at Prime +0.00. If the rates start looking like they are going to increase, lock some more of the balance of the LOC into a fixed mortgage.


Now here's my thinking

These prime rates are not going to stay this low forever. Once inflation sets in, we could see a very large spike in interest rates. (Maybe)

The fixed rates are attractive at the current time.

I'm wondering if the fixed rates will go any lower, but I don't think that they can go much lower to be honest.


Payments....

Keep my payments where they are, or increase the amount??

I could easily pay more every 2 weeks, however, there is that job security thing. If I lost my job, I don't want to be making large mortgage payments.

I'm thinking, keep the payments right where they are right now.

 

[suburbanhobbyist]

These prime rates are not going to stay this low forever. Once inflation sets in, we could see a very large spike in interest rates. (Maybe)

The banks don't think that interest rates are going anywhere for at least the next four years, and I have proof. I say this is because I have a fixed mortgage with 2.5 years left. My bank called me out of the blue about a month ago and offered me about a .5% reduction in my fixed rate if I locked in for an additional 1.5 years (for a total of four years). There's no reason why they'd do this unless they anticipate making money off it.

Inflation was kept in check over the past 15 years, even when the economy was booming. Though I could see some inflationary pressure in NA resulting from the devaluation of the US dollar, as long as there's global competition, prices will always be kept in check.

Look to Japan. Like the US, they accumulated a massive amount of debt and over-printed money, except they started their cycle about 20 years ago. The result? Even today, 20 years later, their mortgage rates are about 2.5%, among the lowest in the world.

 

[Nickelodeon]

It sounds like you're well on your way to being debt free. Why don't you lock in to the lowest rate you can, with provisions that you can max out contribution payments a couple of times per year.

I assume they still have "pre-payment" options at various times during the life of the mortgage that will let you get to debt free status.

 

[ogibowt]

i just renewed @ 3.75 closed 6 month variable..i was advised at CT that rates could even go lower.... i was gonna renew 5yr closed at 3.9 but she talked me out of it..

 

[fuji]

If I lost my job, I don't want to be making large mortgage payments.

The LoC is not an appropriate place for this money because it is a demand loan--the bank can call you AT ANY TIME and demand you make a full payment of the entire balance. They could also arbitrarily cancel the LoC. This could put you in a very bad spot if you lost your job.

Do you have enough cash set aside to fund your living expenses for six months to a year without dipping into your long-term savings?

Negotiate the lowest payment you can with your bank, but make sure that the terms are flexible enough that you can make large lump sum payments later, or increase your payment substantially.

Then pile up reserve cash until you have 6-12 months of expenses set aside before going back to paying your mortgage via increased payments or lump sum payments.

 

[james t kirk]

i just renewed @ 3.75 closed 6 month variable..i was advised at CT that rates could even go lower.... i was gonna renew 5yr closed at 3.9 but she talked me out of it..

CT = TD Canada Trust????

Wow, Royal has a 5 year 4.15% rate closed mortgage. To me, that seems like a phenominal rate.

3.9% is even better.

Look at it this way......

The Bank of Canada overnight rate is 0.5%. Even if they went to 0, then the Bank Prime would be 2%. Presumably, that is the bottom unless the chartered banks lower the 2% figure.

The RBC website states that the current special offer expires at the end of April. Perhaps there will be better fixed rates in the offing.

It's good to know that CT is 3.9%

 

[james t kirk]

The LoC is not an appropriate place for this money because it is a demand loan--the bank can call you AT ANY TIME and demand you make a full payment of the entire balance. They could also arbitrarily cancel the LoC. This could put you in a very bad spot if you lost your job.

Do you have enough cash set aside to fund your living expenses for six months to a year without dipping into your long-term savings?

Negotiate the lowest payment you can with your bank, but make sure that the terms are flexible enough that you can make large lump sum payments later, or increase your payment substantially.

Then pile up reserve cash until you have 6-12 months of expenses set aside before going back to paying your mortgage via increased payments or lump sum payments.

Interesting, hadn't thought about that angle

I have RRSPs I could cash in to keep me going for a few years. I also have 2 other LOC (unsecured) at 2 different banks (other than RBC).

I'm curious, if I lost my job, how would the RBC find out?

I would think that RBC would not call in my LOC unless I ceased making interest payments - which is all I am required to do.

 

[kumamake]

CT = TD Canada Trust????

Wow, Royal has a 5 year 4.15% rate closed mortgage. To me, that seems like a phenominal rate.

3.9% is even better.

Look at it this way......

The Bank of Canada overnight rate is 0.5%. Even if they went to 0, then the Bank Prime would be 2%. Presumably, that is the bottom unless the chartered banks lower the 2% figure.

The RBC website states that the current special offer expires at the end of April. Perhaps there will be better fixed rates in the offing.

It's good to know that CT is 3.9%

my mortgage is up at the end of may and i just a 3.85% 5 yr /closed from CIBC. they guy i dealt with offered a 4.15% at the begining, but mentioned the following site and the rates offered on it, and he was able to go back to his superiors and bring it down for me. may be you can try the same thing.
check the "mortgage alliance's rates"
http://www.ratesupermarket.ca/best_mortgage_rates/.
good luck.

 

[ogibowt]

CT = TD Canada Trust????

Wow, Royal has a 5 year 4.15% rate closed mortgage. To me, that seems like a phenominal rate.

3.9% is even better.

Look at it this way......

The Bank of Canada overnight rate is 0.5%. Even if they went to 0, then the Bank Prime would be 2%. Presumably, that is the bottom unless the chartered banks lower the 2% figure.

The RBC website states that the current special offer expires at the end of April. Perhaps there will be better fixed rates in the offing.

It's good to know that CT is 3.9%

one little caviat james..ive banked at this particular bank for 20 yrs..i have mutual funds there..and a savings chequing account, along with my rrsp,s..so i had an "in" lol.

 

[Cassini]

The advice I have always received is to minimize your short term interest rates. Go for the 2.5%, especially if you are close to paying your mortgage off.

If you still want to lock the mortgage in, you should be able to do better than 4% currently. Your main problem might be that if you can pay off your mortgage in 4 years, then it is probably not worth enough money to get the really competitive interest rates. Banks like chasing bigger loans.

 

[fuji]

I have RRSPs I could cash in to keep me going for a few years. I also have 2 other LOC (unsecured) at 2 different banks (other than RBC).

Cashing in RRSP's is not great because you permanently lose the contribution room. You should probably start salting away money in these new tax free savings accounts and elsewhere until you have built up a six month buffer outside your RRSP.

I'm curious, if I lost my job, how would the RBC find out?

It's just a risk. They have no direct way of knowing. However, they would notice your borrowing pattern change and that might cause them to phone you and ask some questions.

LoC's are notoriously something that banks only like to give to people who don't need them, and notorious for being yanked away just when they're needed most.

In terms of your mortgage...

With my bank it turns out to be best to ask for a lower payment than you intend to make. That's because most banks allow you to call in and raise your mortgage payment, up to some limit, but you can never lower it below the original amount you negotiated. So when I got my mortgage I negotiated a 25 year amortization period and then once it was set up called in the next day and raised my payment to a 7 year period, which is what I feel I can afford to pay.

In the case of my mortgage I can raise the payment so long as the remaining amortization is not shorter than the remaining term on my mortgage. Since your mortgaqge has only 3-4 years left to go I am not sure it would work--but ask.

The advantage is that if were ever strapped for cash I can, with just a simple phone call, cut my payment to literally a third of what it normally is. Had I negotiated my current payment up front I would not be able to lower it.

 

[atlantica]

Just to clarify, even traditional mortgages are 'callable' at any time, the same as a LOC, so that should not be a deterrent. Unlikely it will ever happen, unless you start messing up payments.

My advice would be to put it all on your line of credit, as it has the lowest interest cost, and the most flexibility. The 2% is still paid w after tax money, so you likely have to make almost 4% to pay for it. Interest rates are likely to remain low for quite some time, and it's unlikely that they will jump up 2.25% in any hurry, which is your break even point from the locked in version.

You can also pay it off faster and not be tied to a 10 or 15% annual dump in max. There will also be no penalty for paying it of faster. In reverse, if you face a set back, you can reduce your payments to Interest Only w a LOC, which u can't do w a traditional.

The only con of using your LOC is that you'll need the personal discipline to pay down (and off) the principal, as there is no such requirement. Pretend it's 4% anyway, base your payments on that and pay it off faster. W a traditional, there will always go some toward the principal.

So, if you have the discipline, and don't see available credit as 'purchasing power', do the LOC. If you have bad spending habits, go traditional and lock it in for the lowest % you can find (use a mge broker).

Good luck.

 

[wbs_durham]

The 4yr fixed rate at RBC is the best 3.85 or 5yr VRM Closed at P+.7 (3.2%) you can switch to a fixed at any time w/o penalty as long as it is equal or longer term. Don't move your HLP to another bank as your P+0 rate on your credit line with vanish and at best be P+.5

Also April 21 BOC is to meet and most likely outcome will be 25bps drop to prime.

 

[Tangwhich]

For what it's worth to you, ING is currently at 3.95% fixed for 5 years

 

[Barca]

i just renewed @ 3.75 closed 6 month variable..i was advised at CT that rates could even go lower.... i was gonna renew 5yr closed at 3.9 but she talked me out of it..

They gotcha. Rates may not be going up soon, but up is the direction they will be going, not down. For 0.15 you could have had piece of mind for 5 years, instead now you will be watching interest rates on a regular basis, trying to head off any rate increases.

If you can get a 5 year rate for under 4% my recommendation is that you take it.

Whenever inflation does hit...it will shoot up like the ejaculation of a virgin having his first sexual experience.

 

[fijiman]

Banks are offering variable at prime +0.75. You have an LOC at prime, which you can roll your mortgage into? And you are in the tailend of paying off your mortgage anyway?

Use the LOC at prime. No doubt.

The money you save in the early year(s) at 2.5% will offset any loss from higher rates in later years. Plus you can pay it down more aggressively if rates spike.

If you have any doubt about this advice, open up an excel spreadsheet and do the math.

fj

 

[fuji]

If you can get a 5 year rate for under 4% my recommendation is that you take it.

I have been mulling this.

In my case I currently have a variable 1.6% rate running as prime minus 0.9% for the next four years. That is a SIGNIFICANTLY better deal than I could negotiate today if I walked into the same bank, or any bank--I'd likely get something like 3% or 3.3% variable today. Prime plus rathre than the prime minus I got seems to be standard now.

I called my bank and they would allow me to convert my variable rate to their current posted fixed rate which is 4% though I could probably get them down to 3.85% if I were persistent enough.

If I were renewing today I have no doubt I'd take the 3.85% but since the 3.85% is a "standard offer" and my 1.6% variable is something you just can't get now I am having a hard time with this decision. I am paying a lot more princpal off every payment at 1.6% than I would at 3.85%.

 

[james t kirk]

Banks are offering variable at prime +0.75. You have an LOC at prime, which you can roll your mortgage into? And you are in the tailend of paying off your mortgage anyway?

Use the LOC at prime. No doubt.

The money you save in the early year(s) at 2.5% will offset any loss from higher rates in later years. Plus you can pay it down more aggressively if rates spike.

If you have any doubt about this advice, open up an excel spreadsheet and do the math.

fj

I have a secured LOC at Prime + 0.00.

My mortgage will be paid off in 40 months, however, my LOC is now far more than my mortgage due to spending a small fortune on some recent renos. If you add the two of them up, I'm probably 120 k in debt.

I'm figuring now to to lock part (half???) of the total debt into a 5 year mortgage if I can get a rate of 3.85% and keep the rest in the LOC which is Prime +0.00.

I've recently paid off my car loan, so that gives me an extra 700.00 a month to put against one debt or another.

What I have to be thinking is - "what if the employment situation goes south?" If I lose my job, I don't want some huge mortgage payments hanging over my head.

With the LOC, all you have to do is pay the interest.

On the other hand, if Prime starts to increase, those interest payments can get pretty harsh.

That as they say is the hell of it.

 

[fuji]

If the bank that gave you a LoC at prime refuses to give you a variable rate mortgage at prime, well, then you can bet that somewhere in their finance department there's a guy drafting the letter that says your LoC rate is going up.

CIBC just finished mailing all their customers telling them that their LoC rates were going up, arbitrarily, by 1% across the board (i.e., if you were prime, you are now prime +1%).

Unlike with a closed variable rate mortgage where you lock in the offset from prime for five years with the LoC the bank usually reserves the right to change the interest rate on the LoC in any way they like at any time they like. Of course they also reserve the right to muck around with their own version of prime too, but they have even more freedom to change your LoC rate.

 

[james t kirk]

They haven't refused anything cause I haven't approached them yet.

Knock on wood, as far as I am aware, the interest rate on my LOC is Prime + 0.00 which is what they have been charging me to date.

I set up an RBC Homeline Plan which is basically a LOC that contains my mortgage and can contain up to 5 mortgages I believe up to the set limit. The mortgages within the plan can all have their own various rates and parameters. If I want, I can hold everything in the LOC with an interest rate that varies with prime.

It is quite possible that somewhere in the mouse-print there is some weasel clause that will allow them to do any number of nasty things.