person applying to refinance a mortgage for their house in canada

Refinance a Mortgage: Simplified Guide for Homeowners

Wednesday Dec 20th, 2023


You may be asking yourself, "Should I refinance my home?" Refinancing a mortgage means breaking your current mortgage and starting a new one, potentially with a different lender.

It's a decision that can lead to significant financial benefits, such as a lower interest rate, access to home equity, or debt consolidation. However, it's crucial to weigh the pros and cons, as breaking your mortgage early can incur substantial pre-payment penalties. Let's delve into the essentials of mortgage refinancing.

Understanding Mortgage Refinance

Why Refinance?

  • Lower Interest Rate: Refinancing for a lower rate can save you money over time. Penalties for breaking your mortgage, such as three months' interest or interest rate differential penalty (IRD), are common, but the long-term savings might outweigh these costs.
  • Accessing Home Equity: You can access up to 80% of your home's value minus any outstanding mortgage. This extra cash can be used for investments, renovations, or education.
  • Debt Consolidation: If you have sufficient home equity, you can consolidate high-interest debts into your mortgage, potentially lowering your overall interest payments.

Pros and Cons of Refinancing

  • Pros: Lower interest rates, debt consolidation, and access to home equity. You can also switch between variable and fixed-rate mortgages.
  • Cons: Potential penalties, reduced motivation to pay down debt quickly, increased overall debt, and the risk of not benefiting from rate type switches.

How to Refinance Your Mortgage

  • Breaking Your Mortgage Contract: This involves ending your current mortgage and starting a new one. Be prepared for pre-payment penalties.
  • Home Equity Line of Credit (HELOC): A HELOC allows you to borrow against your home equity. It functions like a credit card but with lower interest rates due to the secured nature of the loan.
  • Blending and Extending: Your current lender might offer a blended rate, combining your existing rate with additional funds borrowed at current market rates. However, these rates are often higher than competitive market rates.

Costs of Refinancing

  • Legal costs are inevitable as changes need to be made to the financing on title. If your mortgage balance exceeds $200,000, many brokers or lenders may cover these costs.
  • Pre-payment penalties are significant, especially for fixed-rate mortgages. These can be the greater of three months' interest or the IRD. For variable-rate mortgages, it's typically three months' interest.

When to Consider Refinancing

Refinancing can be a smart move when you stand to gain more than you lose in penalties and fees. It's ideal when you can secure a lower interest rate, need to access equity for substantial expenses, or when consolidating debt will significantly reduce your interest payments.

Seeking Professional Advice

To fully understand if refinancing is right for you, consult with a licensed Canadian mortgage broker. They can assess your situation, explain your options, and guide you through the refinancing process to find the best deals.

Refinancing a mortgage is a significant financial decision. It requires careful consideration of your current financial situation, future goals, and the potential benefits and drawbacks. With the right approach and professional guidance, refinancing can be a strategic move to enhance your financial well-being. If you need to consult with a mortgage broker, reach out to us today and we will connect you with the right one ;)

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