Even though your current mortgage guarantees the interest rate won’t change, many Canadian homeowners can receive a lower rate when refinancing their mortgage. This could be quite beneficial to you even if there are certain financial penalties incurred. Receiving a lower interest rate over the term of the mortgage could result in considerable savings over time. This will all depend on the amount owing on the mortgage, combined with the cost of any penalty. With a variable-rate mortgage, the penalty is typically three months worth of interest. With a fixed-rate mortgage, the penalty is usually the greater of interest rate differential, or three months worth of interest. It almost always ends up being the interest rate differential when it comes to fixed rate mortgage penalties.
However, along with saving money on interest costs, there are other reasons you may want to consider refinancing your mortgage. These include accessing equity in the home and consolidating debt. When refinancing a mortgage, Canadian homeowners can generally access as much as 80 percent of the value of the home, minus outstanding mortgages. This readily-available cash can then be used for things such as renovations, education purposes, investments or emergencies. This equity can be accessed in several ways, including refinancing your mortgage, blending and extending the mortgage, and using a home equity line of credit. If the home has enough equity, you’ll be able to consolidate your outstanding high-interest debts by combining them and making just one monthly payment.
Ways of Refinancing a Mortgage
Breaking the existing mortgage early
Many homeowners break their current mortgage early even if there’s a financial penalty involved since they can obtain a more favourable interest rate which saves money in the long run. This is also a way to access equity from the home. The current mortgage is simply done away with and this enables you to negotiate a new one with the lender of your choice.
Home Equity Line of Credit (HELOC)
You will be able to access your home’s equity at your own discretion with a home equity line of credit. With this method, you’ll only need to make the monthly interest payments on the outstanding balance of the mortgage. Your existing mortgage lender will be able to set up a home equity line of credit for you, so long as your current lender offers this mortgage product. Otherwise, you may need to break your current mortgage, and switch to a lender that offers HELOC’s. The maximum amount allowable under a HELOC is to 65% of the appraised value of your home.
Blend and Extend the Current Mortgage
The existing lender may be able to provide you with something known as a blended rate. This is basically a combination of the present mortgage rate as well as any additional cash you may want to borrow at the current market rates. However, be aware that blended rates are typically higher than the lowest mortgage rates available on the market. Therefore, it’s important to compare the cost of the blended rate with the amount of money you’ll save if you decide to break your mortgage. A mortgage broker will readily be able to assist you in these calculations.
Changing the Term Length
When refinancing for a better interest rate, you can also shorten or lengthen the amortization of the mortgage. If you’d like a shorter amortization, this means the monthly payments will be higher, while a longer term will result in lower monthly payments. Just remember that a longer term will cost more money in the long run since the interest will build over time, and higher amortization mortgages pay more in terms of interest per payment than shorter amortizations do.
Changing from Adjustable to Fixed-Rate Mortgages
Many homeowners choose an adjustable-rate mortgage to obtain a lower rate of interest. But you’ll be able to change to a fixed-rate mortgage when refinancing if you believe it’s a better option (ie. if it looks to be trending that the prime rate will soon be on the rise).
Mortgage Refinancing Costs
The cost of refinancing an existing mortgage will depend on the method used to obtain a lower interest rate or to access equity in the home. There will be legal costs involved regardless of your choice, as a lawyer will be needed. However, in some instances, if the mortgage owing is over $200,000, the lender or broker may pick up the costs. In addition, if the mortgage is broken in the middle of the term, the lender will assess a financial penalty of three months worth of interest, or the interest rate differential, depending on the type of mortgage you are breaking.
Speak to a Mortgage Professional
Refinancing an existing mortgage isn’t for everybody, and this is why it’s highly recommended that you speak with a professional mortgage broker before doing so. At MortgageMeister.com, our team of specially-trained brokers will be able to assist you in making the right decision when it comes to refinancing your mortgage. We’ll be able to discuss your options, along with the pros and cons of each situation. We’ll let you know if refinancing will benefit you by considering your unique details concerning your current mortgage balance, rate, and term remaining, as well as your property value and any financial penalty etc.
For more information on refinancing a mortgage and any other mortgage-related matters, please contact us and speak to one of our mortgage professionals today.