Learning Outcomes
- Calculate the extra amount borrowed when refinancing a mortgage or the reduced payment size when renewing a mortgage and making a lump sum payment that drops the balance owing.
It is possible to borrow more money or pay off part of your mortgage when you go to renew your mortgage[1]. Let us first examine making a lump sum payment upon renewal (ie: making an additional payment when renewing your mortgage).
LUMP SUM PAYMENTS
After a mortgage term is up and before a borrower renews their mortgage, they can choose to pay down some of the balance owing with a lump sum payment. This is like the initial down payment, but partway through the mortgage. It is often advisable to make these payments, if you can afford them, as they will save you a lot of interest if there are many years left in your mortgage.
Example 5.12.1
The Frasers term is up on their mortgage. They owe $523,324.15 on their at the end of the term. They have $125,000 saved up to pay down on their mortgage before they renew the mortgage. They will renew for another 15 years. They negotiate an interest rate of 2.88%, compounded semi-annually. What is the size of their new monthly mortgage payments?
First, let us determine the amount they will borrow (PV):
Next, let’s input all the values into the BAII Plus and calculate the size of their payments (PMT):
The Frasers will pay $2,724.56 per month on their mortgage.
THE INCREASING SIZE OF A MORTGAGE UPON RENEWAL (REFINANCING)
After a mortgage term is up, a borrower can choose to increase the size of their new mortgage[2] by borrowing additional money against the mortgage when they renew. Unless necessary, it is often not advisable to increase the size a mortgage. This is because a borrower will pay a lot of interest on the extra money borrowed if there are many years left on the mortgage.
Example 5.12.2
Craig and Joel’s mortgage term is up. For the last 5 years, their mortgage payments have been $3,904/month. Interest rates have dropped since they first bought their place. They are hoping to borrow some money to renovate their kitchen while still keeping their mortgage payments the same (at $3,904/month). How much can they borrow to renovate if they owe $523,324.15 and have 15 years left on their mortgage? Their new interest rate will be 1.99%, compounded semiannually.
If we want to know how much Craig and Joel can borrow, we need to calculate the PV (amount owed) using the $3,904 payment and using the 15 years remaining to calculate N:
Take the difference between the amount they can borrow (PV) and the original amount they would have owed to determine how much extra Craig and Joel can borrow:
Conclusion: Craig and Joel can borrow $84,140.66 to renovate their kitchen[3].
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