Monday, April 26, 2010

Refinancing Deal in the Works

I am refinancing one of my rental properties which I have a 50/50 partner with to take advantage of the lower rates and the bubble era high valuations that have been going around.  I'm going to write about my options and the reason behind the madness.

The Property has been appraised at 900,000 the bank has only approved this refinancing to 75% loan to value so the maximum mortgage I can take is 675,000.

The current mortgage owing is 538,000 and unfortunately it is on a 5 year fixed 5.25% interest rate with 19 months left of the term.  If I want to break this term the penalty interest rate differential (IRD) is a whopping 18,000.

I could blend and extend the mortgage to a new 5 year fixed term. and so not pay any penalties. however I have decided to pay the penalty and get a new 5 year closed variable rate.

It is hard to stomach an $18,000 penalty, however you have to look at it as if this cost was already incurred 3.5 years ago when the old mortgage was put together. Holding onto this mortgage till maturity will result in paying higher interest costs that more than offset the penalty. you may feel better that your not paying the penalty. but it is not a wise choice since it will cost more overall.

The option I will go with is a new 5 year closed variable rate which is going to result in the best cash flow profile for this property. The new mortgage payments are 1,000$ per month less than before and will remain constant for the next 5 years. on top of that I will get a cheque for the $117,000 half of which will be mine.

I have been in the rental property business for 7 years now, and from my experience getting a fixed rate mortgage is a costly mistake that i will never make again. when you buy a fixed rate mortgage you are saying that you know more about interest rates than the bank does. you know rates better than the market. in effect you are swimming with the sharks betting against them and you are thinking that you can win.

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