Typically, in a refinance situation, the borrower pays a penalty to "break" the existing mortgage. The penalty can be significant depending on the mortgage amount, product and period of time left till the existing mortgage matures. One way to reduce the penalty, after all it's the borrower's after tax dollars, is to make the maximum allowable pre-payment on the mortgage prior to refinancing.
Example:
Mortgage balance: $300,000
Pre-payment privileges: 15%
Interest rate: 5%
Penalty: 3 month interest
The client is allowed to make $45,000 of pre-payments annually. Using a line of credit, the borrower would make the $45,000 prepayment reducing the mortgage balance to $255,000. The new mortgage would incorporate the outstanding mortgage balance and the line of credit ($255,000 + $45,000 = $300,000). The penalty has been reduced from $3,750 (mortgage of $300,000) to $3,187.50 (mortgage of $255,000) saving the borrower $562.50 which can be used to cover some of the legal fees.
Nawar Naji, AMP
Mortgage Broker - Mortgage Alliance
www.GTAmortgageAdvisor.ca
