What Does it Mean to Refinance a Mortgage?
To refinance a mortgage simply means to replace your existing mortgage with a new one. The new mortgage most likely has something “better” than your original mortgage, like a different term or a more favourable interest rate.
It is important not to confuse a mortgage refinance with a second mortgage or a mortgage renewal. When you refinance a mortgage, you receive a new loan that is used to pay off the original loan.
Reasons for Refinancing a Mortgage
There are three main reasons that homeowners choose to refinance their mortgage. These are to take advantage of better interest rates than they currently pay, to access equity, and to consolidate debt.
Mortgage Refinancing to Take Advantage of Lower Interest Rates
The top reason that most people choose to refinance their mortgage is to take advantage of a lower interest rate. While you may be required to pay a penalty, breaking your mortgage contract early could save you lots of money in the long run if interest rates have fallen since you took out the original loan. Having a lower interest rate on your mortgage means you’ll have lower monthly payments, and ultimately pay less for your home.
Access Home Equity by Refinancing Your Mortgage
By refinancing, you’re eligible to borrow up to 80% of the value of your home, minus what you still owe on your mortgage or other loans that use your home as security. By accessing the equity in your home you’ll receive money that you can use for lots of things, from home renovations to investing.
Refinance Your Mortgage to Consolidate Debt
As a homeowner, if you’re carrying high interest debt (like credit cards, or car loans) a wise financial decision could be to refinance and pay off those debts. The main benefit of using a refinance to pay off debt, is that the interest rate on a mortgage is usually much, much lower than on things like credit cards and auto loans. Paying off additional debts with a refinance can also give your credit score a boost because Canada’s credit bureaus view paying debts in full as a responsible financial move. As an added bonus you’ll only need to make one payment per month, compared to making multiple payments every month to each vendor you owe.
Interested in refinancing your mortgage? Talk to a Vancouver Mortgage Broker!
How to Refinance Your Mortgage
The most popular method of refinancing is simply breaking your existing mortgage contract. In this situation, you apply for a mortgage with a new lender, and use the funds to pay out the original mortgage. Refinancing gives you total access of up to 80% of your home’s equity. While you will be required to pay the original lender a penalty, if you’re refinancing to take advantage of lower interest rates, you can save money in the long run.
Other Ways to Refinance Your Mortgage
There are two other ways to refinance: a blend-and-extend mortgage, and a home equity line of credit.
A home equity line of credit (HELOC) is different than a traditional loan, as you can access the equity as needed instead of receiving one lump sum of money. With a HELOC, you only pay interest on the amount you owe. Interest rates for a HELOC are only available as variable rates, and they are usually higher than the variable rates of standard 5-year mortgages.
A blend-and-extend is a way of increasing the amount of your existing mortgage and renewing it early. The lender essentially “blends” your existing rate with the current interest rate to calculate your new rate for the term you’ve agreed to. While this does mean you’re locking into an additional term with your existing lender, you would be avoiding the penalties for breaking your mortgage early.
Cost of Refinancing a Mortgage in Canada
While refinancing should save you money long term, there are upfront costs that you need to be aware of.
If you break your mortgage early, you’ll need to pay your lender a penalty fee. Typically, the prepayment penalty is three months’ worth of interest.
Mortgage Discharge Fee
If you refinance with a new lender, your existing lender will be required to discharge the mortgage you have on file with them. Every lender has their own discharge rates. Across Canada discharge fees range from $0 all the way up to $395 depending on the lender.
Your mortgage is always registered on the title of your property. If you refinance, your new mortgage amount needs to be registered to the title on your property. This fee is set by the provincial government (not the lenders) and is usually about $70.
Just like when you entered your original mortgage agreement, a lawyer is required to review the loan’s conditions, conduct a title search (to make sure there are no leans) and register the mortgage. The legal fees for refinancing a mortgage can go up to $1000. If the balance of your mortgage is large enough ( > $200,000 ) the new lender may pay this fee for you.
How a Mortgage Broker Makes Mortgage Refinancing Easier
If you’re thinking about refinancing your mortgage, it is always highly recommended to work with a mortgage broker. An experienced mortgage broker will review your current mortgage situation, and help determine a course of action that will save you the most money. Because mortgage brokers have a wide network of lenders, they will research and review all the mortgage products available on your behalf, getting you the best possible rate. A mortgage broker also knows exactly what the lender will be looking for, and will help you ensure all your ducks are in a row prior to application submission, increasing your chances of being approved. An added bonus of working with a mortgage broker, is that they do all of this for you, free of charge! A mortgage broker is paid by the lender (not the client), but only when your new mortgage is approved.
5 Mortgage Refinance Tips
Refinancing a mortgage is essentially just applying for a new mortgage. When applying for a mortgage there are some things you can do to make the process easier, save money, and increase your chances of being approved.
1. Do Your Research
Remember that there are lots of lenders out there, not just the big banks you’re already aware of. Every lender has their own set of mortgage products, so shopping around to find the mortgage that suits you best will be well worth it. However, doing lender research can be very time consuming. If you work with a mortgage broker they will take this task entirely off your hands.
2. Act Swiftly
If interest rates are low and you are interested in refinancing, make your move quickly. Getting your application in early is essential to making sure you snag low rates before they rise.
3. Double Check Your Credit Score
Refinancing to take advantage of low interest rates is enticing, but if your credit isn’t good, you likely won’t be able to qualify for them. Before submitting your application, review your credit score. If it isn’t in great shape, take the time to improve it before trying to refinance.
4. Have Your Documentation Ready
Just like when you applied for your original mortgage, a new lender is going to require all of your documents. Have your credit reports, tax returns, T4s, and all proof of income ready to submit. This makes the application process go much quicker.
5. Make Sure it Make Sense
In many cases refinancing to get a lower interest rate or access equity is a smart financial move, but not always. It is important to take into account the costs that come with refinancing to make sure it is the right decision for you.
A common rule of thumb to think about is how long it will take you to break even on the costs you’ll pay to refinance. If your mortgage payments are reduced by $200, and you had to pay $4000 to refinance, you’ll theoretically begin saving money in 20 months.