What you should know about refinancing
Refinancing is not the same as renewing or switching an existing mortgage to a new lender. The latter can be done at no extra cost and typically little changes except the amortization period or term, the interest rate and the financial institution if you decide to move it elsewhere to take advantage of better rates or prepayment terms. Consider it a refresh.
Refinancing, on the other hand, is the equivalent of a brand new day because it is in fact the creation of a new mortgage at a higher value that replaces the existing mortgage. As a result, there will be legal and appraisal fees.
“When you refinance you are typically looking to take equity out of your home to fund something and that’s why you are increasing the value of the mortgage,” says Laura Parsons, mortgage expert, BMO Bank of Montreal in Calgary.
As a general rule of thumb, it only makes sense to refinance if you are going to increase the size of the mortgage by at least $20,000 because there are legal costs involved, says Dan Eisner, CEO True North Mortgage brokerage from his Calgary office.
“You want to make it worth your while. For that same reason, it’s important to consider the timing of the refinance. While ideally it’s best to refinance when your mortgage is up for renewal so you avoid any penalties for paying out early, the reality is that most refinances are done in the middle of a mortgage term because life doesn’t play nice that way. Call your lender to find out what that penalty is going to be. The cost may not be worth it.”
Most people refinance for a few different reasons: in order to consolidate debt, to pay for a renovation, to buy a rental property or vacation property or to invest, for example. Advertisement
“One of the first things I like clients to think about is why are they refinancing. If it’s to pay down credit card debt, for example, then you have to consider the amortization period and whether you can pay off the debt outside the mortgage earlier,” says Ms. Parsons. “That’s critical because mortgages are long-term investments and credit card debt is something you want to pay down quick. The longer the amortization period, the more interest you pay.” Her best advice: Expedite repayment. Have a deadline for when you want to pay that additional money back. Twenty-five years is too long.
What else you should know:
Any other legal claims or secured line of credit against the property will be closed or paid off when you refinance, says Mr. Eisner.
“You may be able to get a new line of credit, but you can’t keep the current one.”
Mortgage rates are the same whether it’s a purchase or a refinance.
You can refinance up to about 80% of the current value market value of the property with conventional financing. Borrowing more than that will require you to take a high ratio mortgage and pay a premium to take equity out of your home, says Ms. Parsons. A refinance requires a full appraisal of the property and lenders don’t like to lend on properties in the middle of renovations. “We often tell clients don’t start a renovation unless you have enough money to finish it or get the money first,” says Mr. Eisner.
Understand what prepayment privilege options are available as the ability to make additional payments could allow you to cut the long-term interest costs of the mortgage and provide significant savings.
“Since the federal government announced it was not going to raise the Canada Mortgage and Housing Corporation’s (CMHC) limit for insuring mortgages, the CMHC is insuring fewer rental properties and so financial institutions have less appetite to finance them,” says Mr. Eisner.
Consider the big picture, says Ms. Parsons. “Understand how refinancing fits into your overall financial plan.”