With mortgage interest rates at their lowest in a decade you might be thinking about a mortgage refinance and asking yourself two very prudent questions: Can I refinance my property? Should I refinance my property?
Firstly, you probably can refinance and get a better interest rate. However, there are pros and cons to a mortgage refinance. These often depend on the terms of your existing mortgage and your personal situation. So, let’s take a look…
Can I refinance my mortgage?
Yes, probably. You can even refinance your mortgage more than once. That said, there are a few factors to consider when deciding if a mortgage refinance will work for you, we’ll get to those a little later. You might not be able to refinance if your employment has changed significantly recently. Or, if your income or credit rating has declined substantially.
Can I get a lower mortgage interest rate?
If, like today, interest rates have dropped and are lower than when you took out your existing mortgage it’s likely that you can refinance your mortgage to a lower interest rate. You can refinance to a fixed rate mortgage and lock-in guaranteed low rates for the next five years. Or, pick the closed variable and benefit from its flexibility.
Can I consolidate debt with a mortgage refinance?
If you have equity in your home you may be able to consolidate high-interest rate debt such as vehicle financing and credit card balances into your new mortgage. These debts might be spread over a longer period but paying lower interest overall can also mean you can pay them off much faster.
Mortgage refinancing myths debunked
“I’ve already refinanced – I can’t refinance again.”
Yes, you can. However you may need to have built up some equity in your home since the last time. Or, you can simply assess the benefits of refinancing just your existing mortgage balance for a lower rate. You, or your mortgage broker, will need to calculate any penalties and closing costs versus your interest savings over time.
“I’m tied in to my existing mortgage term.”
Though you may only be part way through a three or five year mortgage term you can refinance before the end of the term. It’s important to compare the cost of any penalties and closing costs with the savings from a lower interest rate.
“My penalty will be too high.”
It could be lower than you think. Or, depending on your current interest rate, the savings you will make on your monthly and term repayments could far outweigh any penalties for breaking from your existing lender.
“My 25-year amortization will start all over again.”
It doesn’t have to. Depending on your specific circumstances it’s more than possible to continue with the same amortization period that you have remaining today. You can plan to pay off your mortgage in 23 years, for example. And you can always add extra money to the principal balance which pays your home off much faster.
The costs of a mortgage refinance and other considerations
As we’ve mentioned, your current lender may apply a penalty if you break away from your mortgage with them. This penalty amount varies greatly between mortgage lenders and is often highest with major banks. Your mortgage broker can help you to find out what your penalty might be. And, if a mortgage refinance is worth it. It often is!
Appraisal and closing costs
To accurately estimate the value of your home in today’s market and for your lender, you’ll need to pay for a full appraisal. If you are making changes to the value of your mortgage, withdrawing equity or paying out debts, you’ll need to engage a notary or lawyer to finalize the new mortgage and changes to your property title. Your mortgage broker will coordinate all of this for you.
Qualifying for a mortgage refinance
With mortgage refinancing a lender will qualify a mortgage application in a similar way to a mortgage for a purchase. They will assess your income, assets and liabilities, and your credit history. Every circumstance is different and an expert mortgage broker will be able to quickly suggest suitable options for you.
Consolidating debt and accessing equity
If you consolidate debt from higher-interest, short-term lending you will be spreading your debt over a longer period. Having short-term debt is often its own incentive to pay it off faster. Accessing equity in your home and increasing your mortgage amount will increase your monthly payments and your long term debt. When choosing a mortgage, pick an option which allows you to make additional payments or pay out your mortgage faster. This gives you the option and incentive to reduce your long term debt. This is always covered in detail with you by your mortgage broker.
The benefits of a mortgage refinance
A lower mortgage interest rate and money saved
Mortgage interest rates today are the lowest they have been in Canada for nearly a decade. So, it’s likely you can access a lower interest rate, and for some this is a much lower interest rate, than you have currently. A lower mortgage interest rate means lower monthly mortgage payments, less to pay over the term of your mortgage and greater facility to payout your mortgage early. More of your payment now goes directly to the loan balance and not to just interest.
Consolidating debt and accessing equity
Depending on your circumstances the ability to consolidate debt can reduce your monthly overall payments and make daily life simply much more affordable. By consolidating debt into your mortgage, your short-term, high interest, credit can be spread over a longer term and with a much lower rate of interest. Allowing you to pay off the balance much faster.
If your property value has increased since you took out your mortgage, a refinance may allow you to borrow that additional equity from your home by increasing your mortgage balance. Increasing your mortgage amount will increase your mortgage payments. However, accessing today’s lower interest rates may negate some of this increase, while allowing for much more of the payment to go to the principal debt. If you don’t want or need to consolidate debt, you can access equity in your home to invest in other property or to make home improvements.
Changing mortgage terms
A mortgage refinance also allows you to change your mortgage terms. You can take another five year fixed or variable term. You could change from a variable mortgage interest rate to a fixed interest rate and lock in today’s low rates for longer. Or, you could increase or decrease your mortgage amortization.
Adam Coultish, expert Mortgage Advisor at Dominion Lending Centres Northwest, is always available to discuss the pros and cons of a mortgage refinance with BC homeowners. You can call him for advice now at 250 638 3302.