The latest data from Statistics Canada indicates that home ownership is on the rise in Canada. With property prices on the rise, Canadians are sitting on a lot of home equity in their homes. Refinancing your mortgage can be a great way to fund many of your life goals – whether if it’s buying another property, consolidate debt, reduce interest costs, pay for education, or support your business. Mortgages usually have lower rates comparing to other credit products, such as personal line of credit, credit cards, or commercial loans. We have put together this comprehensive Mortgage Refinance Guide to help you understand all the jargon. Let us help you evaluate your options!
1. What is mortgage refinancing?
Mortgage refinancing refers to the replacement of an existing mortgage with a new mortgage. You can use refinance mortgage to obtain a higher mortgage amount, a different term, a lower mortgage rate, or to change borrower(s) on the mortgage.
2. Mortgage Refinance vs. Renewal
These two types of transactions are being talked about together a lot, so sometimes it’s easy to mix them up.
Mortgage Renewal
Mortgage Renewal is when your mortgage terms is up for maturity and you need to pick a new mortgage.
- Most of the times, people keep their mortgage amount the same as before at the time of renewal. However, you can choose to increase your mortgage amount, which will require a new mortgage application.
- For example, if you have a five-year fixed mortgage, at the end of year five, you need to decide whether you would like to change to a different term, whether you want to stay in fixed rate or variable, or to switch to another lender entirely if they have better offers.
- There is no penalty or cost at the time of renewal.
- If you are sticking to your existing lender, you do not need any credit application to renewal your mortgage.
Mortgage Refinance
Mortgage Refinance can be done at any time during your mortgage term.
- Most of the times refinancing involves borrowing more money, i.e. taking the equity out from your home.
- For example, if you have a 5 year fixed mortgage, and at year 2 you decided to take more money out of your home equity, you can apply for a refinance at that time.
- There will be pre-payment penalties if you refinance before your mortgage is up for renewal, because by refinancing you are “breaking” your mortgage. This article goes into more details on how much pre-payment penalties/breakage fees you may be charged. You can also estimate your pre-payment penalties using our calculator.
- A new mortgage application is usually required for a refinance. You can refinance with your existing lender or a different lender.
3. What are the top five reasons for a mortgage refinance?
Reduce interest cost
If you have a fixed rate mortgage, and the interest rate decreases, refinancing can potentially reduce your interest cost and monthly payments. Below is an example demonstrating how much you may be able to save by refinancing into a lower rate.
| Existing Mortgage | Refinance | Savings | |
| Mortgage Amount | 500,000 | 500,000 | |
| Interest Rate | 3% | 2.5% | |
| Monthly Payment | 2,500 | 2,200 | $200 per month cash saving |
| Interest Cost (5 Years) | $70,000 | $57,000 | $13,000 saved over 5 years |
As you can see, the saving over the term of the mortgage can be quite significant. Let’s assume your prepayment penalty is $5000 (it can be more or less than that depending many factors), net-net you are will still save $8,000 over five years by refinancing your mortgage. You can out how much you can refinance and the current mortgage rates by answering a few questions.
Consolidate Debt
If you have a lot of higher interest debt, such as credit card debt, car loans, etc., you may want to consider refinancing to pay off your debt and reduce your overall interest payment. For example, let’s assume you have $50,000 in credit card debt at 20% interest per year. If you refinance your home by taking out a $50,000 mortgage at 3%, you can save $8,500 per year on interest cost, i.e. (20%-3%) x $50,000. Use this Debt Consolidation Calculator to find out how much you can save!
Purchase Another Property
If you are looking to purchase a rental property or a second home, you can refinance to access equity in your existing house and use it as the down payment for your new purchase. Many real estate investors use this technique to help them growth their portfolio. For snowbirds, mortgages may not be accessible in a foreign country, whether it’s the Caribbean or certain part of the U.S. Refinancing provides another way to help them purchase their dream home.
Finance Your Education
Mortgage rates are normally lower than both government and private Student Loan rates. Therefore, refinancing your mortgage to pay for your kids’ (or your own) education may cost less than taking out a student loan.
Help You to Get Through a Divorce or Breakup
No one plans for a divorce or a breakup when they purchase a house together with their significant other, but life happens. If you have gotten a mortgage together with your spouse as co-borrowers, at the time of the divorce, the mortgage often needs to be assumed by one person or the other. Therefore, rather than two people paying for the mortgage you may have to carry the mortgage yourself (or your spouse has to). In that case, you will need to requalify for a mortgage by doing a refinance.
This type of refinance does not change the mortgage amount, but simply removes one borrower from the mortgage. The spouse is usually removed from the title of the house at the same time, but it really depends on what your separation agreement says. During a divorce/break up, your finances may be negatively impacted. If you are unable to qualify for the entire mortgage on your own, getting a private mortgage or second mortgage may be a temporary measure to help you temporary until you get back on your feet.
4. What are the reasons NOT to refinance your mortgage?
If you can’t afford the payment
That’s the first question you need to ask yourself when you take on any type of debt – can I afford it? Regardless of the purpose of the refinance, if you feel financially stretched to make the monthly payment based on your income and spending patterns, then don’t do it.
If you plan to use it for risky investments
Whether it’s a penny stock that is supposed to quadruple in a. year or a “once-in-a-life” business opportunity, use your home equity to invest in high risk financial product or business ventures puts the ownership of your house at stake. Use refinancing to invest smartly may improve your financial well-being. However, if those investments do not pan out, which leads to you default on your mortgage, you may be forced into a foreclosure and lose your house.
5. When should you refinance your mortgage?
Many people choose to refinance at the time of renewal. As discussed above, if you refinance before your current term matures, you may be charged a pre-payment penalty. However, if the interest rate saving is greater than the penalty, it may still worth refinancing even if your mortgage is not up for renewal yet.
6. How much can you refinance?
How much you can qualify for a refinance mortgage largely depends on your income and the value of your house, which determines your Loan-to-value (LTV). Estimate how much you can refinance by using our Refinance Calculator.
Loan-to-Value (LTV)
LTV is calculated using your mortgage amount divided by your property value. You can refinance up to 80% of your property value, ,i.e. 80% LTV. For example, if your home is currently valued at $1,000,000, the maximum refinance mortgage amount you can qualify for is $8000,000. For certain “non-conforming” programs, such as Newcomers to Canada, Self-employed Mortgage, or if you have a lower credit score, certain lenders only allow you to refinance up to 65% of the property value. On the other hand, some private lenders may refinance your mortgage up to 95% of your home value, but at a higher interest rate.
Income
Your income also plays an important role in how much you can qualify. The higher your income, the more monthly payment you will be able to afford based on most lenders’ criteria.
7. What are the mortgage refinance rates?
Refinance interest rates are similar to most conventional mortgage interest rates. One thing to point out is that because the maximum refinance LTV is 80%, refinance mortgage is not eligible for mortgage default insurance. Many lenders offer a lower interest rate for default insured mortgages. Therefore, refinance mortgage rates are usually higher than default insurance mortgage rates. You can get the lowest mortgage refinance rates in less than 2 minutes here. Talk to one of our experienced mortgage advisors today for any questions you may have.
8. How much does it cost to refinance your mortgage?
The main costs for refinancing your mortgage include prepayment penalty/breakage, legal fees, title cost, and appraisal cost. You only need to pay a prepayment penalty if you refinance before your mortgage is up for renewal. We covered prepayment penalty extensively in this article.
- Your refinance transaction may or may not require a lawyer depending on the nature and complexity of the refinance. Legal cost for refinance usually ranges between $1,000 to $2,000. If your refinance does not require a lawyer, there will likely be a “title cost”, which is to change or increase the “lien” the bank has registered on your property.
- Last but not least, refinancing requires an updated appraisal report on your property to ensure the value of your home is up-to-date. This is used for the lender to assess your Loan-to-Value. The appraisal report usually costs between $300 to $400 dollars.
9. Does refinancing impact your credit?
Usually refinancing doesn’t impact your credit. However, if you shop your mortgage rate with too many lenders, your credit file will get “multiple inquiries/hits” from different lenders, which will negatively impact your credit score. That’s why it’s beneficial to use an experienced mortgage broker, who will only check your credit once and then negotiable the best rate for you with multiple lenders on your behalf.
The Bottom Line
Mortgage refinance is more complicated than it sounds, so does making the decision of refinancing vs not refinancing. We are happy to help. Our advisors are doing thousands of refinance mortgages every year. Let us help you every step along the way on your refinance journey and find you the perfect mortgage!
