Q Last week, one of the loan managers at my local bank offered to refinance the mortgage on my home. My first mortgage is approximately $200,000 at 8 per cent interest rate with two years left. They offered a 7 per cent for two years. I would have to pay a $4,400 penalty to break my existing mortgage. Should I take the new mortgage?
-Dimitri, York
A The mortgage debacle in the United States has been felt around the world and Canadians are no exception. With falling interest rates, many homeowners may be faced with refinancing dilemmas. There are many factors to consider — the following approach may help with your decision. Consider these two factors: The interest rate differential and the opportunity cost of penalty.
1. Compare the difference in interest rate: 1% (8%-7%) decrease on $200,000 is a saving of approximately $2,000 per year.
2. Opportunity cost of penalty are what earnings are given up by paying penalty. $4,400 3% GIC less assumed 40% tax rate. You would give up approximately $80 per year
3. Savings if refinanced: Savings less cost of penalty ($2,000 minus $80) is $1,920 per year.
At face value, this does not appear to be a good deal for you.
A real estate professional may provide some assistance.
Henry Choo Chong, CGA provides professional accounting and taxation solutions for individuals, businesses and corporations. Henry can be reached at 416-590-1728, ext. 304. E-mail all questions to Money Matters: choochonghcga@yahoo.ca.
