mrs. and mr hill purchased a detached home in North york for $1,200,000 with a down payment of 25%. for the remainder they signed a mortgage contract with BMO at 6.25% compounded semi-annually (fixed rate fro 5 years) and monthly payments for 25 years.

A)

after 3.5 years, interest rates drop to 4.52% compunded semi-annually. there is a penalty of 3 months interest on the outstanding balance for early repayment. does it pay to refinance?

B)

if the penalty is based on the interest rate differential (difference between the contractual interest rate on the loan and the current interest rate) calculated as

penalty = outstanding loan balance x IRD x term remaining in payment period) does it pay to refinance?