The ideal candidate for a mortgage conversion would be someone who intends to continue occupying the property for at least the next 3 years (mortgages can be ported but it's tricky to get it right...and the interest per day charged can outweigh the logistics of doing this so therefore most people who move wind up with new mortgages). When "Interest Rate Differentials" apply is when a client has a fixed rate mortgage at an interest rate higher than today's market rates, therefore a rate that is higher than what the bank can now sell the money for. These penalties typically render the conversion of the mortgage financially illogical unless the client has other logical reasons for incurring the penalty. Logical reasons I would summarize as the following:
•· Client wants to do a major renovation
•· Client has lots of other higher interest rate debt like credit cards etc
•· Client wants to reduce their overall monthly expenses by consolidating all their debt and by increasing the length of their remaining amortization we can reduce their overall monthly outlay. These people will know that by doing this there is no savings per se on the mortgage rate reduction after the penalty is factored in...the client will make up the penalty in a matter of time (hence why the need to occupy the residence for a few years to make it worthwhile). These people should also know that if they were to wait until their maturity date...they could do this penalty free. As long as people know this, then it can still make sense to break their mortgage if they find a combination of all their bills, car loans etc too financially crippling where it leaves them with little to no spending money and that's why the debts rack up.
•· Client feels that when their mortgage comes up for renewal, interest rates will be much higher...therefore their securing their budget for the future.
When the dreaded IRD penalty kicks in...it's a very tough situation...when clients ask me about their 5.79% (example) rates with 2 years left on their term (example) before renewal, about incurring a 15K penalty (example) on a 300K mortgage, UNLESS they have some of the reasons listed above, it would make very little sense as it would take them longer to save on the overall mortgage than their remaining term.
So the ideal candidate would be someone on a VARIABLE rate mortgage. The beauty of a variable rate mortgage is the penalty is only 3 months of interest in 99% of the cases and if the client has a spread on prime not as attractive as today's rates...then this is the PERFECT conversion candidate.