When is a Good Time to Refinance Your Mortgage?
Written by Anita Saulite
Monday, October 28th, 2019
The latest data from Statistics Canada indicates that home ownership is on the rise in Canada. Almost three-quarters of Canadian families with a mortgage have a fixed rate mortgage, 21% have a variable rate, and 5% have a combination of a fixed and variable rate mortgage.
With soaring home prices, many Canadians have built up equity in their homes but may feel they're cash-squeezed. In today's low interest rate environment, refinancing your mortgage may be an attractive strategy to lower your total monthly payments or to use the equity for other financial goals that will reap future rewards.
But is it a good strategy for you? It really depends on your situation.
What Do You Need to Know about Mortgage Refinancing?
"Refinancing your mortgage isn't a bad thing, but it's important to understand whether it's right for your financial situation and if your lender has viable refinance options, which keep the costs of reaching your goals cost effective," said George Kibalian, Senior Manager, Content & Change Management at Tangerine.
"Many Canadians don't really understand mortgage refinancing, but it's a very popular strategy. In fact, around 2011 the popularity surged when interest rates dropped to historic lows."
People Refinance their Mortgage for Different Reasons
Some may want to take advantage of lower interest rates to reduce their payments and don't need additional money. Other people want to take advantage of lower interest rates to reduce their payments and get access to more money.
The "extra" money could be used to:
- Renovate a home/kitchen
- Pay down high interest credit cards to reduce overall monthly payments and make one lower payment
- Pay for a major purchase or a child's education
Let's look at an example of a typical mortgage holder:
Let's say someone has a $200,000 mortgage (at 4% interest over a 20 year amortization) and $50,000 in unsecured debt at high interest rates. They pay a total of $2,300 per month towards these debts ($1,250 for mortgage and $1,250 for minimum 2.5% payment on unsecured debt). They also need $50,000 to renovate and pay for a child's education.
Now let's say they refinance for $310,000 (including an assumed prepayment charge of $10,000 which is added to the balance) at a lower rate of 3%. The payment at 3% at a 25-year amortization would be $1,467 for their term. That's a savings of $900. They can take that $900 and put it back into the mortgage to get out of debt faster, while meeting other financial goals.
Can You Get Out of Your Existing Mortgage?
It's hard to know if refinancing your mortgage is the right strategy for you since it depends on your financial situation and priorities. For many people, taking on more debt causes stress and reduces savings. Consider these 3 steps:
- Reach out to your mortgage lender. Ask about your mortgage refinancing options and how difficult it would be to get out of your existing mortgage. If you're looking for access to funds for other goals, find out how much you can borrow. Ask if they have options that avoid paying a prepayment charge, such as blended rate options, or if they can offer a discount on the prepayment charge in a refinancing situation.
- Ask about your mortgage prepayment charge. Generally, the prepayment charge for a variable rate mortgage is 3 months of interest payments, and for a fixed rate mortgage it's the higher of 3 months of interest payments and an interest rate differential amount. But this can vary by financial institution and is based on the clauses in your mortgage. Ask your financial institution to do the math and see if it's better to wait until you renew and if those options put you in a better financial position.
- Shop around. You might find a better deal somewhere else, but if you switch your mortgage and refinance with another financial institution, you may have to pay legal, administrative and registration costs charged by the other lender.
"Mortgage refinancing isn't for everyone," says Kibalian. "But before you decide to go ahead, make sure you fully understand your options."