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.
"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."
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:
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.
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:
"Mortgage refinancing isn't for everyone," says Kibalian. "But before you decide to go ahead, make sure you fully understand your options."
This article is provided for information purposes only. It isn’t meant to be relied upon as financial, tax or investment advice, makes no guarantees about future financial conditions or performance, and shouldn’t be considered a recommendation to buy or sell investments or financial products....Information contained in this article, including information related to interest rates, market conditions, tax rules, and other investment factors is subject to change without notice, and Tangerine Bank isn’t responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication, and Tangerine Bank doesn’t guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.