Did you know that renegotiate your mortgage is the same thing than refinancing it?
What happens if rates go down? Would it be better for you to renegotiate your mortgage to get a better interest rate? Of course, you will have a penalty for starting from scratch. But the situation may now be different.
With most home mortgage and loans providers as banks, you could terminate you contract before its end and conclude a new one with actual conditions (as interest rate).
In return, banks require a monetary compensation, calculated on your situation (and difference between rates), which can reach several thousands of dollars. This penalty allows them to offset their monetary loss due to shortfall in rates.
But do banks losses come from? From transactions the bank is committed to each mortgage, whatever the rate is. When banks grant mortgage loans, they borrow on the capital market to refinance themselves.
Bank takes a no risk investment, as with government bonds or capital market, which lasts the term of the mortgage. Thus, banks work as mirrors which duplicate each loan in the capital market.
This set of transactions works as a permanent flux, as banks temporary borrow tens or even hundreds of millions of dollars to cover its home mortgage portfolio. The difference between two rates (rate and capital market rate) determines the margin.
When homeowner breaks his home mortgage, bank is left with a loan it cannot back in the capital market. If banks customers can break their contracts, banks cannot. Therefore, bank invests the money it has recovered from capital market to pay interest on its debt.
And the falling rates creates another disadvantage. This rates difference creates a loss for banks compared to the previous conditions of mortgage.
Fortunately, it is often possible to negotiate your home mortgage with your bank when rates fall. And current conditions provide good opportunities. And it is possible that rates fall again. Thus, it could be worthwhile to wait. But conditions are already so good that it may be better to act now instead of attempt a gamble.
Because if central banks around the world have reduced their rate (which reduce rates), it is only to stimulate the economy during the crisis. They will increase as the economy will get a better health.
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