What Does The Above Example Prove?
The above example, brown background, compares someone that stays with their 6.25% mortgage for the whole 5 year period with two other possibilities. They continue to pay 75% of each payment to interest and after 5 years have a balance of approximately $135,225.
The next two examples assume you switch to lower rates of interest but maintain the original payment of $982.11 each month.
The second example switches to a fixed rate 5% mortgage which reduces the amount of each payment going to interest by almost 20% and reduces the balance by a whoping $10,000. Not bad but we can do better.
The third example switches to a variable rate mortgage that offers the first 3 months at 2.25%, balance at prime -.375% or 4.125% based on current prime rate of 4.50%, and 1% cash back of $1250. You can see the amount of each payment going to interest is reduced by almost 30% from the original mortgage and a balance of almost $20,000 less. This is only an example as no one knows if the Prime Rate will rise or fall over the next 5 years.
The two above examples are for someone that wants to pay less interest and pay more off the principal each year.
If you want lower monthly payments example two would save you about $109 a month and example three would save about $182 a month based on current Prime Rate of 4.50%.
Tax Deductible Debt vs Non Tax Deductible Debt
Obviously paying a higher interest rate without a benefit attached doesn't make sense although millions of homeowners do it. So what kind of benefit could make it worth while to pay a higher rate of interest.
- Tax deductability. What would happen if you moved part of your principal mortgage to your investment property? You would create tax deductible debt. Also see my tax deductible web page for more information on making your principal mortgage tax deductible.
- RRSP benefit. If you purchase an RRSP with money from your investment property or principal residence you receive a tax deduction, the money in the RRSP is non taxable, the money borrowed from your investment property could be tax deductible. So why operate an investment property with a positive cash flow?
For example a mortgage with a 5% interest rate that is not tax deductible might be less advantageous then a 7% mortgage that is tax dedcutible. It depends how the debt is structured.
KNOWING EXACTLY when is the perfect time to refinance would require a bit of psychic ability on your part. That's why many experts say if you find a good deal that saves you a significant amount of money, it's probably not worth trying to beat it by predicting mortgage-rate moves.
So what rate would you need before refinancing makes sense? That's what this worksheet is designed to tell you. One thing to keep in mind, though: The interest rate isn't the only thing to consider when shopping for a new loan. Refinancing, after all, isn't free. There are the bank fees, the bills for a new appraisal and inspection, your lawyer's fee — you name it. This worksheet will help you figure out how much you'll save on your monthly payments with a lower rate and how long it will take, given those savings, to repay the cost of getting a new loan.
