With interest rates at all-time low levels and with lots of value built up in homes across Canada, now could be the ideal time to unlock your equity with a mortgage refinance.
What Is Mortgage Refinancing?
Mortgage refinancing is a contract with a lender for a new loan to pay off the original loan. This can relate to any kind of debt: auto, home, education, etc. However, what is important to understand is that refinancing is not magical. Instead, the core aspects of the original loan will remain:
- Your collateral that contributed to the approval of the original loan.
- The original loan balance, which you cannot reduce.
Moreover, mortgage refinancing can lead to greater debt. This regularly happens with a so-called cash-out refinance. In such a refinancing situation, you simply take money out of the difference between your original debt and the refinanced debt. Furthermore, you can include your refinancing costs in your new debt instead of paying it upfront.
In short, mortgage refinancing decreases the interest owed on your original debt, while the collateral and balance for your original loan remain the same. This means that refinancing doesn’t remove the danger of your home or car from being repossessed if you fail to pay off the new loan. However, it is possible to refinance a loan into a personal unsecured loan. Such a loan doesn’t use property as collateral. Secured loans, as is the case with mortgage loans, do require property collateral.
What New Lower Interest Rates Mean for You
As you may have noticed, the current interest rate in Canada, just as in the United States, is near zero. However, this doesn’t necessarily mean that mortgage rates will decrease accordingly. In the shorter term, mortgage rates change almost daily, so this is not something to focus on.
Instead, homeowners should concentrate on their credit score along with the home equity used as collateral. If both factors are high, the lender will offer you a more competitive refinancing interest rate for your new loan.
When dealing with new mortgage loans, we are dealing with large numbers. This means that even half a percent makes enough difference to seek refinancing. Today, many banks have their own online credit and mortgage refinancing calculators, so please make sure to take advantage of them to get a clearer picture of whether refinancing is worthwhile in your case.
If it does, and you have also increased your credit score, then you are in a good position to refinance your loan to get a lower interest rate. Moreover, the circumstances surrounding the housing market might have changed significantly since the time you applied for your mortgage. If your home equity is now higher, this alone will warrant refinancing. Lastly, if your home equity is above 20% of the mortgage, it will not be necessary (in most cases) to get costly mortgage insurance.
How Much Does It Cost to Refinance?
The cost of mortgage refinancing is dependent on the province you reside in and on the lender itself. Generally speaking, you should expect to pay between 3 to 6% of the original principal in refinancing fees. These fees cover the entire process of refinancing, which includes:
Given the bank’s risk, such costs are predictable, as they mostly cover all contingencies and ensure both your payment capability and your collateral equity. Of course, large loans, such as home loans, accrue thousands of dollars in cost. Overall, expect up to CA$1,000 in fees, in addition to the percentage of the principal, which is the origination fee.
Should I Refinance My Mortgage?
Usually, the mortgage market hits the snooze button in winter. However, the pandemic fears delayed much of the real-estate sales in 2020, pushing them into winter. This December, Canadian HSBC bank reached a new milestone with a 0.99% adjustable-rate mortgage, hitting a new low below 1% in the Canadian mortgage market.
This trend follows drastic cuts in borrowing costs in the wake of the Bank of Canada’s reduction of its interest rate to near zero in March and April. Although variable interest rates are more directly tied to the central bank’s rate, both fixed and variable rates are currently at record lows. In other words, with the cost of borrowing so low, you are more likely to get a better loan deal through refinancing, even with included fees.
If you do decide to take the mortgage refinancing deal, it should take just over a month, about 36 days on average, from placing the application to the closing. On the other hand, if you are more interested in refinancing as a cash-out for an event in your life, the difference between the original and new balance could be substantial.
How Mortgage Refinancing Can Hurt You
Outside of mortgage refinancing fees, which can amount to 6% of the outstanding principal, you also must consider whether to extend your new loan term. If the time span is prolonged, even a lower interest rate may outpace the ultimate payout. You always need to balance optimal monthly mortgage payments with the total amount that must be paid.
Moreover, not all loans are created equally. Some have integrated benefits, which are eliminated with refinancing. For example, Canadian student loans offer greater flexibility than regular loans with such options as temporary reprieve or deferred payment. These loans often can be partially forgiven if you opt to work in a public service sector.
Furthermore, mortgage refinancing can cause a heightened risk of losing your property, which is why it is important to understand the difference between recourse and nonrecourse home loans. The latter are those that limit lenders from taking any property other than collateral. Therefore, one should exercise caution as to the type of refinancing loan.
Ready to Refinance?
When you are ready to refinance, make sure your credit score is as high as possible given your current financial situation. This is the biggest factor that goes into getting lower interest rates. Other than that, it’s up to you to compare and shop around for rates. Loan amortization can give you an overview of your interest rates across different loans. This online amortization calculator is one of many to get you started.
When you receive at least three mortgage refinancing quotes for a loan in your province, take care to consider all their fees and interest rates. Lastly, try not to take on any additional debt during the one-month refinancing period.
Frequently Asked Mortgage Refinancing Questions
How does my credit score affect mortgage refinancing?
Depending on what type of debt you want to refinance, your minimum credit score could go as low as 580, but in most cases, it should be at least 620. Of course, the higher it is, the more beneficial the interest rates will be.
Can I refinance my mortgage to consolidate debt?
When we talk about debt consolidation, we mean combining multiple debts into a single payment schedule. One of the biggest components of such consolidation is the mortgage loan. With current mortgage interest rates at record lows, organizing all your debts with different interest rates and end-dates into a singular debt pipeline is a sound choice if your payment discipline is high enough and if you do your homework. As a rule, take care that your total monthly debt doesn’t surpass 40% of your gross income.
How often can I refinance my mortgage?
In practical terms, there is no limit to the times you can refinance your mortgage, but your ability to conduct refinancing will be severely limited by your unburdened equity if you decide to make a cash-out against the balance of your new and old debt.
Can I refinance my mortgage without a job?
Not being officially employed is a big no-no for banks, no matter if you are seeking small credit lines or refinancing a mortgage. Even if you have a steady income, this is rarely recognized as sufficient proof. However, freelancers with a provable, significant public presence and high income may have a much better chance of refinancing a mortgage.
The Bottom Line of Mortgage Refinancing
With the current low-interest rate mortgage market, refinancing becomes a no-brainer proposition. Nonetheless, if you have other debts with higher interest rates, such as credit cards, the closing costs of refinancing could easily dwarf other debts. That is why it is a good idea to get a clear picture of your situation with a refinance calculator, in addition to getting quotes from multiple mortgage lenders.
Only when you are sure you will save money in the long run is it time to refinance.