Mortgage Math: very INTERESTing…

Since last week, the CIBC and Scotiabank have been waging a polite battle over my home mortgage. Since that initial inquiry from CIBC, I’ve had a few telephone conversations with both banks.  Scotia has now elevated my inquiries to the branch manager level too. Oh what fun!

As I reported yesterday, my mortgage is really comprised of three distinct banking products. Because that’s the case, it makes the analysis of my options a little more complicated. At least a gal who graduated from art school thinks it’s complicated!

Here’s the status quo (all at Scotiabank):

  • product 1: mortgage of $223,545 at 2.15% variable
  • product 2: mortgage of $107,566 at 4.16% fixed
  • product 3: unsecured line of credit, $39,749 at 5.5% variable (Prime plus 2.5%)

For the record, all the math I’ve done is considering that interest rates will remain stable (which I know will never happen), and I’m not presuming any additional lump sum payments. So, where the rate is variable, I must consider there will be a shift over time. There are also issues of cashback offers and penalties, which are not part of my intial assessment. I’m looking big picture, rather than short term pain/gain.

Here are three options:

  1. Do nothing:  If I continue with all my current products and change nothing, I estimate a total interest payment to the bank of $94,590 over the remaining life of my mortgage, which will be about 12 years for loan 1, 20 years for loan 2 and 11 years for loan 3. Can you say ouch? My annual mortgage payments are estimated at $33,360, with an average monthly bill of about $2780.00
  2. Move it all to CIBC: With their offer of 2.5% (variable, prime minus .5%, calculated monthly), I’d be looking at a total interest payment of $74,111 over 15 years. Better than $94K for sure. This would see the whole thing paid off in 15 years, or when I’m 62. My annual mortgage payments are estimated at $29,540 with an average monthly bill of $2,462. Cheaper to carry monthly, and I save 20K over the status quo.
  3. Take Scotia’s new offer: Scotia is suggesting we keep loan 1 as is. It’s hard to touch 2.15% and that’s my biggest loan. They’re further suggesting to break loan 2 (penalty to be discussed later) and start a new one at 2.2% (variable, prime minus .8%, calculated semi-annually). In addition to breaking loan 2, they’re also suggesting that we take the maximum that my equity will allow out of loan 3, and merge it with loan 2. That amount would be 33K. Therefore, loan 3 would be reduced to about 6K, and loan 2 would be increased to about $140,566K. In addition, they’re seeing an improvement in my credit rating, and I’ve gone to the top of their class. Therefore, they’re proposing a reduction in the interest for loan 3 at 4.5%. See, I told you it was complicated!

SO, with loan 1 as is, loan 2 boosted by 33K but dropped to 2.2%, and loan 3 with a much reduced principle and reduced interest rate, I’d be paying a total of $55,681 in interest over the life of the mortgage. Loan 3 would be gone in 32 months, loan 1 would be gone in 12 years, and loan 2 would be paid out in 15 years. The biggest chunk of my mortgage would be paid when I’m 60, and I’d have a smaller amount to deal with until I’m 63.

With Scotia’s new offer, I’d be paying $34,100 annually toward my mortgage, for an average monthly payment of about $2841.00.

If somebody came up to me and said “Hey Tracy, let’s do a bit of paperwork now, and give me about $150 more per month, and I’ll give you 40K when you’re in your 60s, I’d really be tempted.

Although I’ve done these types of calculations many times before, I’m always amazed at how interest adds up over the life of a mortgage. In the short term, there’s not a huge differential, but when you look at interest over the life of an amortization – man, that’s powerful motivation.

I can give a bank $94,590 if I do nothing (my status quo), or I can move banks and save 20K by paying $74,111 in interest (move to CIBC), or I can allow the bank that has my business now to negotiate a better deal, and pay out an estimated $55,681 in interest (negotiate with Scotia).

Scotia has also offered me a 3 year term at 2.99% fixed for Loan 2, which I didn’t fully elaborate on above. Over the next few days, I’ll weigh in on the cost of carrying these options, and the penalties and perks that are being offered. I haven’t made the decision yet, but there’s one thing I know for sure – I’ll be saving some money between now and 62  🙂

Oh finally, thanks to the calculator here, it helped a lot!


One response to this post.

  1. Posted by Moe on November 4, 2011 at 1:14 pm

    Which one did you finally picked?

    I have a similar situation on hand all with Scotiabank:
    option 1) 2.15% 5 closed variable. I have the option to close but not sure what the rate would be if I decide to do so.

    option 2) 2.49% 2 year close
    option 3) 2.99 4 year closed (this is from RBC) Scotia can’t match this. And like you I am an existing scotia customer.



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