Wednesday, April 15, 2009

Renewing the Mortgage

Princess and I just renewed our mortgage. I have to say that it is a great time to do this, with interest rates being as low as they are tight now.

Considering the current economic situation, and probable inflation coming in the next couple of years (as a result of so much cash being infused into the economy), we decided to go with a 5-year fixed rate mortgage. We got a fairly good rate at 4.5% (down from 5.7% we had been paying since last year).

I am well aware that this is going against oft-mentioned statistics saying that a variable-rate mortgage usually (I think the statustuc is 90% of the times) comes ahead in the long run. And the variable rate of 3.25% was also appealing. However, I think we are in that 10% period where a fixed-rate mortgage will come ahead. I wouldn't be surprised to see interest rates climbing significantly in 2010. The big question will be by how much.

In addition to the renewal of the mortgage, we rolled in the heat exchange loan into our mortgage. That was a 10-year loan (taken 2.5 years ago) at a fixed rate of 8.5%. It was an ok rate at the time, but rolling it into our mortgage will decrease that rate by 4%, which is a lot.

All told, even with adding the heat exchange loan to our mortgage, our mortgage payments remain the same as they were before we renewed -- that's a decrease of about $150 per month. :o)

So what we are also doing is increasing our payments by that $150 per month. So our payments are remaining the same, but repayment of the mortgage will be faster.

As you can guess, we are quite happy with that. We could have gotten a better rate elsewhere (ING Direct was posting a 3.95% 5-year rate), but being able to roll in the loan, and saving the trouble of switching bank was good. And our credit union usually kick back parts of the interest paid by members, so our actual rate is lower than 4.5% (probably around 4.2%).

We also have a good relationship with our credit union. We are satisfied with what we got. :o)


phil said...

On 135k$, 0.55% (4.5% - 3.95%) is about 750$ a year. I find that expensive for a bank relationship. But I'm in the same situation. Always debating if I should go for the high-rate + ristourne or go for low-rate ING.

The "ristourne" usually kicks back about a month of interest. Best case, this brings your rate down to about 4.1%, still higher than 3.95%. But I think the ristournes are going to come down since the economic slowdown will affect Desjardins as well.

Also, I'm fairly confident that ING would let you roll in the personal loan. Banks love consolidating loans you have with other institutions. They prefer that you send all your interest dollars to them. It's just about grabbing market share from the competition.

Frog of Finance said...

We spent some time doing the math, and although we could have saved a little money by going with ING, it would have been more trouble.

First the money part. As I mentioned, we considered the fact that the kick back ("ristourne") would be lower this year, thus the effective interest rate of 4.2% (an estimated average over 5 years). Our mortgage will be at $105K, so that's only a difference of about $260 the first year. That difference will dwindle down over the years as the capital gets paid down.

Then the trouble part. Changing bank for the mortgage would mean going back to the notary. Even if ING pays for the associated fees, that takes time (and not all notaries do business with ING, apparently).

So yes, it is going to cost us a little more than switching over to ING would have, but that's not too big a difference, and we are satisfied with the situation. :o)

MG (moneygardener) said...

very wise to keep you outlay the same...