# Renewing and Renegotiating Your Mortgage

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1 ABCs of Mortgages Series Renewing and Renegotiating Your Mortgage Smart mortgage decisions start here

12 Example: Blend-and-extend calculation New interest rate = (A x B) + [(C x (D B)] D A: interest rate of your existing mortgage term B: remaining months in the existing term C:Extoday s interest rate for the new term D:Exnumber of months in the new term Note: This method of calculating the blended rate has been simplified for illustration purposes and does not factor in any prepayment charges which may also be blended into the new rate or paid at the time of renegotiation. Contact your financial institution for their exact blended rate. Example Linda is considering breaking her mortgage contract to renegotiate a new mortgage with her existing lender, Lender X. Assumptions: Mortgage balance: \$200,000 Existing interest rate: 5.5% Remaining amortization: 22 years Today s interest rate for a 5-year term from Existing term: 5 years current lender: 4.0% Months left in term: 24 Blend-and-extend interest rate: 4.6% Payment frequency: monthly Prepayment charge to break mortgage: \$6,000 If Linda decides to renegotiate a new mortgage at an interest rate of 4.0% with her existing lender, she will pay \$36,701 in interest for a new five-year term. She will also have to pay a prepayment charge of \$6,000 for breaking her mortgage contract. When the interest and the prepayment charge are combined, Linda s total cost would be \$42, Note: In this example, Linda pays her \$6,000 prepayment charge at the time she breaks her mortgage contract. If she added the charge amount to a new mortgage, it would increase the amount of interest she would have to pay. Linda decides to compare this to her other options, which include using her lender s blend-andextend option and shopping around with different lenders.

13 Scenario 1: Blend-and-extend with existing lender (at 4.6% interest rate) If Linda decides to use her lender s blend-and-extend option, her new mortgage rate would be as follows: Blend-and-extend calculation (5.5% x 24 months) + [(4.0% x (60 months 24 months)] 60 months = (5.5% x 24 months) + [4.0% x 36 months] 60 months = ( )% 60 = 4.6% A = 5.5% (interest rate for existing term) B = 24 (number of months left in the existing term) C = 4.0% (interest rate currently available for a 5-year term) D = 60 (number of months in a 5-year term) Blended rate: 4.6% Old rate: 5.5% New rate: 4.0% Number of months If Linda chooses the blend-and-extend option, her mortgage rate will be 4.6% for the next 60 months. She will pay \$42,367 in interest over the next five years. 11

14 Scenario 2: Renegotiating with Lender Y (at 3.75% interest rate) Interest rate offered by Lender Y 3.75% Interest charges for new five-year term, plus prepayment charge due to Lender X Interest charges: Prepayment charge: Total: \$34,350 + \$6,000 \$40,350 Savings compared to blend-and-extend option \$2,017 Scenario 3: Renegotiating with Lender Z (at 3.5% interest rate) Interest rate offered by Lender Z 3.5% Interest charges for new five-year term, plus prepayment charge due to Lender X Interest charges: Prepayment charge: Total: \$32,005 + \$6,000 \$38,005 Savings compared to blend-and-extend option \$4,362 Important: in the examples above, the savings to renegotiate Linda s mortgage with a new lender do not take into account any fees required to set up the new mortgage. Unless your new lender is willing to pay some or all of these fees, they will reduce any potential savings you might be able to achieve by renegotiating for a lower interest rate. To find the option that best suits her needs, Linda will need to consider all the costs involved, including any prepayment charge and fees that could apply. 12

16 Compare the costs of renegotiating with the potential benefits. Make sure you have complete information about any prepayment charges and fees involved before making a decision. About the ABCs of Mortgages Series The ABCs of Mortgages series explains the features and costs of mortgages. The following resources are part of the series and are available on FCAC s website at itpaystoknow.gc.ca: Publications Buying Your First Home Paying Off Your Mortgage Faster Renewing and Renegotiating Your Mortgage Borrowing on Home Equity Mortgage Prepayment: Know Your Options Tip sheets Shopping Around for a Mortgage Buying and Maintaining a Home: Planning Your Housing Budget Choosing an Amortization Period: What is the Impact on Your Mortgage Understanding Variable Interest Rate Mortgages Understanding Reverse Mortgages Protect Yourself from Real Estate Fraud Online tools Mortgage Qualifier Tool Mortgage Calculator Tool Online Quiz 14 Mortgage Quiz

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