Thinking About Refinancing Your Mortgage?
Key Considerations
Refinancing your mortgage means you get a new mortgage and use the proceeds from that mortgage to pay off your existing mortgage. As a Canadian homeowner, you may have heard about mortgage refinancing but might not be sure what it requires or if it is a good option for you. You can refinance with either your current lender or a new lender. While it may seem daunting, refinancing can offer many benefits that may make it worthwhile.
To avoid paying any prepayment penalties the best time to refinance with a new lender is when your current mortgage is maturing. You will receive a renewal offer from your current lender. The rates in these offers are often not competitive. Do not sign back the renewal offer right away. It is best to search the market and talk to a mortgage broker to see what options are available for you. Refinancing with another lender at renewal is a great opportunity for you to:
find a mortgage that better suits your needs,
move on from your current lender if you are not satisfied with them, or
seek a better rate in the market.
There are pros and cons to refinancing, so it is important to understand the potential benefits as well as the challenges.
The benefits are many:
Lower Your Monthly Payment
Refinancing your mortgage can help reduce your monthly payments if you can refinance at a lower interest rate. You may be able to secure a lower interest rate than the rate on your current mortgage if:
- your credit score has improved, and you can qualify for a higher credit quality mortgage,
- current interest rates are lower than when you initially took out your mortgage, or
- you have a variable-rate mortgage and interest rates have increased significantly. You might be able to refinance into a lower rate short-term or fixed-rate mortgage.
The resulting lower monthly payments can help free up some of your budget, which you can use for other expenses or to pay down debt.
Consolidate Debt
If you have multiple high-interest debts, such as credit cards, a line of credit or personal loan, refinancing your mortgage can be a smart way to consolidate that debt into one loan. Debt secured by your home usually carries a lower interest rate than unsecured debt. By rolling all your debt into one mortgage, you will have a lower interest rate and a single monthly payment, which makes it easier to manage. With your debts consolidated in one lower cost mortgage, you can use the savings to pay down your debt faster.
Access Equity
Refinancing can also give you access to the equity in your home. Equity is the difference between the market value of your home and the amount you owe on your mortgage. By refinancing, you can take out a new loan for more than your outstanding balance and cash out some of that equity you have in the home. This cash can be used for home renovations, paying off high-interest debt, or other expenses. It is important to remember that taking cash out of your home equity will increase your mortgage balance, resulting in higher monthly payments.
Switching from a Variable-Rate to a Fixed-Rate Mortgage
If you currently have a variable-rate mortgage and are worried about rising interest rates, refinancing to a fixed-rate mortgage may be a good option for you. Fixed-rate mortgages offer stability and predictability, making it easier to budget and plan for the future. Fixed-rate mortgages usually have a slightly higher interest rate than variable-rate mortgages (although that is not the case at the time of writing this in April 2023). They also offer protection against future rate hikes, giving you peace of mind that your financing is secure without any exposure to interest rate risk. The typically higher rate for a fixed-rate mortgage versus a riskier variable-rate mortgage can be considered the cost of insuring yourself against potential interest rate risk.
Refinancing for any of the foregoing benefits can be done with your current lender or with a new lender. However, you will only know if you got the best solution is you shop around.
The following are additional benefits available only if you refinance with a new lender.
Find Better Loan Terms
Another reason to refinance your mortgage is to find better loan terms with another lender. For instance, if you need prepayment flexibility going forward, you may shop for lenders with the fairest prepayment penalty charges.
Find Better Service
Finding a good mortgage rate is important but it is not the only thing that matters. You also want to be with a lender that provides great service and demonstrates that they respect you. We all know that many large organizations, such as the big Canadian banks, struggle to provide the best service. Once a lender has shown you disrespect or poor service, no rate should be sufficient to keep you there. You have options. There are so many mortgage lenders today that can match or beat the rate shown to you by your current lender. If you have received great service, then that lender has earned some points with you and, if they offer a competitive rate, you are likely to stay with them. If they have provided poor service, move on. You deserve better.
Find Happiness
There can be many reasons to not be happy with your current mortgage other than poor service:
Many Canadian mortgage borrowers are stressed today due to higher interest rates. Those that took out a variable-rate mortgage during the covid period in 2020-2021 started with a low rate but learned quickly how the risk of a variable-rate mortgage can bite. Some of you didn’t even have a preference for variable-rates but took one because you advisor or lender said it was the best thing. Perhaps, it is time to move away from that advisor/lender and protect yourself against interest rate risk;
Some of you may have looked for flexibility from your lender regarding prepayments or portability and found out that the terms of your mortgage do not provide the flexibility you need. Perhaps, it is time to find a lender with better terms; or
If you are now at renewal time for your mortgage, you may have found out that your current lender has offered you an uncompetitive rate on the renewal. For a good customer that is current on their mortgage this is disrespectful. Perhaps, it is time to move to a lender than acts like they want your business.
Whatever your circumstances, the mortgage decision is not just based on numbers. Find yourself a good rate but also find happiness. Peace of mind with your financing enhances the homeownership experience.
Things to Watch Out For
If you are considering refinancing your mortgage there are some things that you need to be cautious about. Refinancing is not always possible. When it is, it may benefit you, but there still may be some costs and challenges to get a refinancing done:
If you refinance your mortgage before the scheduled maturity date of your mortgage, you will likely have to pay a prepayment penalty to break your existing mortgage. The minimum penalty is three months of interest in most cases, but the penalty can be higher if you have a fixed-rate mortgage and rates have declined since you took out the mortgage. The larger your mortgage, the larger the penalty, and it can add up into the tens of thousands of dollars;
If you refinance with your current lender, the paperwork will be less. They already have you on file and can run a streamlined process as a result. When you refinance with a new lender, you need to be fully underwritten by the new lender so there will be more paperwork;
There will be fees to discharge your existing mortgage when you refinance with a new lender. Sometimes the new lender will help cover some of the costs, but this is an expense you should be aware of;
The best opportunity to refinance without significant prepayment penalties is at the renewal date of your mortgage. At maturity, you can take out a new mortgage and then pay out your existing mortgage without penalty;
Now that we are in a higher interest rate environment, passing the mortgage stress test might be a challenge, particularly If your debt ratios were high when you took out the original mortgage and your income has not materially increased.
Conclusion
Refinancing your mortgage can offer many benefits, from lowering your monthly payments to accessing equity in your home. It is not necessarily the right solution for everyone so do your homework and shop around the find what is possible. Your best mortgage alternative to secure your financial future might be available with a new lender. Make sure you understand the process so you can find a mortgage that will not expose you to unnecessary risk and bring you peace of mind.
It is important to consult with a mortgage broker to evaluate your refinancing options and determine if it is the right financial move for you. A mortgage broker can help you navigate the process, find the best rates and terms, and ensure that you are making an informed decision that aligns with your financial goals.
At Frank Mortgage we place the customer first. You can take advantage of a free consultation with one of our expert advisors by visiting us at www.frankmortgage.com or calling us at 1-888-850-1337. We promise to be frank with you about the options for your mortgage renewal or refinancing.
Don Scott
Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.
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