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Mortgage Refinance: What you need to know.

While getting a mortgage might seem like the end of your home-buying journey, there are actually many things you can do with your home equity after the fact. In Canada, a mortgage refinance is one way to potentially secure a lower interest rate, consolidate your debt and even tap into some of the equity in your home. Keep reading for more information on exactly what mortgage refinancing is, how to qualify for it and whether it’s something you should consider. If you’re ready to shop the market right now, LowestRates.ca allows you to compare mortgage refinance rates from banks, brokers, and lenders across Canada in just minutes.

Your questions about mortgage refinances, answered.

What is mortgage refinancing?

Refinancing your mortgage is a popular way to access equity in your home. You can refinance a mortgage in one of three ways. The first way is by breaking your current mortgage and starting a brand new one with either the same lender or a new lender. The second way is by taking on a second mortgage through a home equity line of credit (HELOC) or home equity loan. The third option is known as a blended mortgage. With this option, homeowners can “blend and extend” their mortgage, which refers to blending a new mortgage rate with an existing mortgage rate.

There are a number of reasons to refinance your mortgage, which might include taking advantage of your home equity or debt consolidation.. If mortgage rates have decreased since you purchased your home, the rate on your refinanced mortgage may be lower than your current rate, which is another popular reason to refinance.

When interest rates go down in Canada, a mortgage refinance allows borrowers to pay off their old mortgage loan with a new mortgage loan at a more favourable interest rate. However, if you choose to refinance your home by breaking your mortgage, you may be subject to penalties.

Taking on a second mortgage or choosing a blended mortgage are both ways to refinance your home without breaking your current mortgage and paying large penalties. This allows you to avoid repayment fees for doing so.

It’s up to you to determine whether the financial benefits of breaking your mortgage outweigh the fees you may have to pay. Keep reading to learn more about whether you should consider refinancing your mortgage loan.

How does a mortgage refinance work?

A mortgage refinance allows homeowners to access the equity they’ve built up in their homes. You’re allowed to borrow up to 80% of the value of your home, minus the outstanding principal on your current mortgage. See below for an example of what the owner of a $500,000 home with an outstanding mortgage balance of $100,000 might be eligible for.

  • Value of home: $500,000
    • $500,000 x 80%.
    • Maximum loan amount: $400,000
  • Outstanding mortgage balance: $100,000
    • $400,000 - $100,000.
    • Refinancing credit limit: $300,000

The homeowner in this scenario would be able to refinance their home for $300,000.

What are some reasons to refinance your mortgage?

Secure a lower interest rate or a different term: If you’re looking to secure a lower interest rate on your mortgage, a refinance might be a great option for you. Homeowners whose properties have gone up in value are in an especially good position to benefit from a mortgage refinance by securing a lower rate. In this scenario, you may also be able to save money by requesting a shorter amortization period or a different rate structure, as longer amortization periods pose a greater risk to the lender. For instance, you may be able to secure a cheaper mortgage refinance rate at a 15, 20 or 25-year amortization period. Comparing the market on LowestRates.ca can help you secure the lowest mortgage refinance rates available today.

Clients can still secure a lower rate by just paying the penalty themselves (many lenders will allow consumers to roll up to $3,000 of the mortgage penalty into the new mortgage). This would be considered a switch or preterm/early renewal.

Consolidate your debt: Another popular reason to refinance is to consolidate debts. This is only a viable option if you’ve accumulated enough equity in your home to cover the cost of your other debts. When you roll your debt into your refinanced mortgage, your new mortgage loan includes your mortgage payment plus payments towards your other debts. The benefit of this option is that now you are making one monthly payment that will likely be lower than what you were paying previously. Doing this can help you redirect your monthly income towards savings and growing your wealth.

Access your home equity: A mortgage refinance is a good option for individuals looking to liquefy the equity in their homes. If you wish to access your equity in your home by refinancing your mortgage, you can do so through a number of different financing options. Keep reading to learn more about how to access home equity by refinancing your mortgage.

Change your mortgage term: This is usually done as part of the refinancing process. When you refinance your mortgage, you and your lender will agree on a new amount, a new rate and a new mortgage term as well as amortization. For instance, if you currently have a 5-year fixed-rate mortgage, a refinance would let you change your mortgage to a 3-year variable-rate mortgage. This in turn will impact your amortization schedule as well. In the scenario above, you would have less time to pay off your mortgage in full.

How can I refinance my mortgage to consolidate my debt?

Homeowners looking to refinance their mortgages to consolidate their debts will do this with something known as a “cash-out refinance.” This increases your outstanding mortgage balance by the amount of debt you’d like to pay off. This type of refinancing lets the homeowner borrow money on top of their original mortgage loan to pay off high-interest debt in a single monthly payment.

In order to do this however, you’ll first need to make sure that you have enough equity in your home to pay off your debt. For instance, in the example below, the homeowner has $300,000 of equity in their home and $50,000 in debt they’d like to roll into their mortgage.

  • Value of home: $500,000
  • Maximum equity allowed to access: 80%
    • $500,000 x 80%.
    • Maximum loan amount: $400,000.
  • Outstanding mortgage balance: $100,000.
    • $400,000 - $100,000.
    • Debt Consolidation Limit: $300,000.
  • New Mortgage Amount: $100,000 + $50,000 = $150,000.
    • Remaining Home equity: $300,000 - $150,000 = $250,000.

How can I refinance my home without breaking my mortgage?

When you refinance your mortgage, you are allowed to borrow up to 80% of the value of your home, minus any outstanding balance on your mortgage loan or any other loans secured by your primary residence. However, there are also a number of options for those who want to tap into the equity in their homes without breaking their mortgages. They include the following.

Second mortgages: This is a loan that you take out on your home, which is secured by your home equity. With this type of mortgage loan, as with any type of secured mortgage or HELOC product, you may go into foreclosure if you can’t make your payments and your loan goes into default.

HELOC: A home equity line of credit (HELOC) is a popular way for homeowners to access their home equity to use for other things. HELOCs often come with flexible payment schedules and allow you to access funding as you need it. This means that you won’t pay interest on any money you haven’t used. The interest rate on a HELOC is typically higher than a 5-year variable rate mortgage . One major benefit of a HELOC is that you won’t have to break your mortgage, which may mean fewer fees for you in the long run. An additional benefit is the interest payments, which are significantly lower than paying the interest on a lump sum loan. This is ideal for anyone doing renovations who may be having trouble finding the money otherwise. Many lenders will also allow you to convert the balance of HELOC into a mortgage.

Home equity loan: A home equity loan is another name for a second mortgage, but it can also refer to other ways to borrow against your home’s equity. The outstanding principal on your mortgage is subtracted from the amount you’re allowed to borrow from the value of your home. If the homeowners are unable to make their payments and the home goes into foreclosure, the first mortgage lender will be paid out before the second mortgage lender is paid. However, homeowners can also take out a home equity loan after they’ve paid off the mortgage principal on their property. This would be just a first position mortgage as there are no other mortgages on the property but it would still be considered a home equity loan. They’re able to borrow up to the full 80% of their home’s value.

Blended mortgages: Many lenders will allow homeowners to “blend and extend” their mortgages. With this option, homeowners do not have to break their mortgages to access a lower mortgage rate. A blended mortgage lets homeowners combine the rate from an existing mortgage with the rate from a new mortgage to create a new mortgage rate that’s somewhere in the middle. Homeowners can choose to access equity during the process, which will then be added back to their mortgage loan and used to “extend” their mortgage. Homeowners who want to take advantage of this tool but don’t want to extend their mortgages can also request a “blend to term” option where they can secure a lower interest rate without increasing their mortgage term. Because lenders are more likely to lose money on this option, it’s typically only offered to homeowners who want to take out equity, which increases their mortgage amount.

When is it worth it to refinance your mortgage?

In some cases, you may be required to break your current mortgage in order to refinance your home. This can often come with hefty penalties depending on when you decide to refinance and whether the method you choose requires you to break your current mortgage contract. This is most applicable when you’re refinancing your mortgage to get a better rate on your loan payments. You may save money on your payments moving forward, but you’ll also have to pay a fee for breaking your mortgage.

You’ll want to be sure that the money you save from refinancing is greater than the money you’ll lose by breaking your mortgage. A broker or lender can advise you on whether refinancing your mortgage will leave you with more money at the end of the day, or less

What are the current mortgage refinance rates?

The current mortgage refinance rates are usually higher than the current mortgage rates. The rates you’re offered will often depend on the company you refinance your mortgage with. Remember, refinancing your mortgage means that you pay off your existing mortgage with a new one to tap into a number of potential benefits. Therefore, be sure to consider today’s rates when you refinance a mortgage. While the rates for refinancing your mortgage will be higher than the current mortgage rates, they may still be lower than they were when you originally purchased your home. LowestRates.ca updates its mortgage refinance rates daily. Shop mortgage refinance rates by filling out the form above.

If you’re looking to refinance your mortgage, this graph shows rates in Canada dating back to last year for you to compare.

When is it a good idea to refinance a mortgage?

You’re not planning to move: If you’re not planning to remain in the property for long, refinancing your mortgage may not be your best bet. This is because refinancing your mortgage either requires you to break your current mortgage, take out a second mortgage on your property or blend and extend your current mortgage. A refinance may also come with additional legal and appraisal fees. It may take several years to recover these costs, but you’ll never realize these savings if you prematurely sell your home.

You can save between 1-2% on your rate: Again, refinancing your home comes with additional fees. It’s important to determine ahead of time that your long term savings will outweigh the upfront costs. This is usually accomplished by securing a lower rate on your new mortgage loan. A rule of thumb is to see whether you can reduce your rate by at least one or two percentage points; if you can, refinancing may be worth it.

You can shorten the length of your amortization: A shorter loan term is generally lower risk to a lender because it expects to receive its money back sooner. This means that lenders may offer borrowers with a shorter loan term a lower rate. If you’re able to refinance your home at a lower rate, there’s a good chance you might be able to shorten your loan term as well without significantly increasing your monthly payments.

The fee for breaking your mortgage doesn’t outweigh the gains: Regardless of your reason for refinancing your mortgage, it’s important to remember doing so can be costly. These upfront costs might be worth the long term savings, but it’s important to determine this before committing to a refinance.

What are the requirements to refinance my mortgage?

Your status as a homeowner doesn’t mean your mortgage lender will automatically approve you for a mortgage refinance. Prospective borrowers will need to meet other criteria to qualify.

The stress test: To qualify for a mortgage refinance in Canada at a bank, you’ll need to pass the mortgage “stress test,” just as if you were buying a new home. The stress test requires prospective buyers to qualify for a mortgage under the median five-year fixed mortgage rate, plus 2%. The same goes for mortgage refinances. Homeowners looking to refinance their mortgages will need to qualify for their new mortgage loan at the median five-year fixed mortgage rate plus 2% or the Bank of Canada’s benchmark rate (whichever is higher).

Income and debt ratios: Similar to applying for a regular mortgage, lenders will determine whether you have a reliable stream of income and whether that income is high enough to qualify for your new mortgage loan. In addition, lenders will also look at your Gross Debt Services (GDS) and Total Debt Services (TDS) ratios to determine whether you can handle potentially higher monthly payments. As per the guidelines from the Canadian Mortgage and Housing Corporation (CMHC), your GDS ratio should not exceed 39% of your gross annual income. Furthermore, your TDS ratio should not exceed 42%. You may be able to be approved at a 44% TDS ratio if you have a strong credit rating and a good application overall. If you have enough liquid assets to reassure the lender that your mortgage payments will be made, this could be even higher.

Equity: The general rule of thumb is that you should own 20% of your home before you decide to refinance, though each lender may have a different set of criteria.

Lenders will also look at your credit history, which means that borrowers with bad credit who hope to refinance their mortgage may have a hard time being approved or securing the lowest possible rate.

What are the costs of refinancing your mortgage?

There is no such thing as a “no-fee” mortgage refinance, lower rates aside. Even if you’re saving money in the long-run, it’s unlikely that you’ll be able to both secure that lower rate and refinance your mortgage at zero-cost.

While securing the best mortgage refinance rates with no closing costs might not be possible, you can be sure to secure the best mortgage refinance rates today by comparing the market on LowestRates.ca.

  • Appraisal fees: In order to refinance your home, you’ll need to understand its full value. Having your home appraised can usually cost between $250-$350
  • Title insurance: When you refinance your home, many lenders will require you to obtain title insurance. These policies protect the lender and the homeowner against title fraud should a fraudster claim to be the true owner of the home. Title insurance is a one-time expense of less than $300 for properties worth less than $1,000,000. For every additional refinance, you’ll need to purchase an additional title insurance policy.
  • Legal fees: You’ll definitely want to consult a lawyer before and during the process of refinancing your home. Legal fees for a refinance can range from $700 to $1,000.
  • Breaking your mortgage: Every lender will charge you a different fee to break your mortgage, which can sometimes amount to thousands of dollars. Your lender may give you a discount on this fee if you choose to break your mortgage to start a new one with the same lender.

How can I get the best rate on my mortgage refinance?

If you’ve decided to refinance your mortgage for any number of reasons, you’ll want to make sure you secure the best rate. While the rates provided by mortgage refinance calculators can give you a general idea of your costs, the best way to ensure that you secure the best rate on your mortgage refinance is to compare the market before locking into a contract.

At LowestRates.ca, you can find cheap mortgage refinance rates from the top banks and mortgage brokers in Canada. All you have to do is fill out a form to see a comparison of rates from mortgage refinance lenders in your area.

Some other tips for getting a cheap rate on your mortgage refinance include:

  • Shorten your amortization period — If you choose to refinance your mortgage, a 15-year, fixed-rate mortgage won’t yield a lower rate than a 30-year, fixed-rate mortgage. A refinance is similar to a conventional mortgage in that shorter loan periods are considered lower risk to the lender because they get their money back sooner, but mortgage refinance rates will only differ if you can shorten your amortization from 30 years to 25 years.
  • Reduce your debt — Your lender will look at your GDS and TDS ratios to determine whether you can handle your monthly housing costs before approving you for a mortgage refinance. You may be able to reduce your risk - and therefore, reduce your rate - by chipping away at your unpaid debt.
  • Improve your credit history — One of the best ways to indicate to a lender that you’re able to make payments on time, which makes you more likely to secure a low rate - is to demonstrate a strong credit history. Mortgage refinance rates are no exception. Spending a bit of time improving your credit history before applying for a loan can go a long way towards getting the best rates for mortgage refinances today.

What if I refinance the mortgage on a second property?

While, in many ways, refinancing a second property will be similar to refinancing a primary residence, lenders may require you to have more equity in the property than if you were refinancing a home you lived in. Furthermore, rates on a mortgage refinance for a rental property may prove to be higher than if you refinanced the home you live in. This is because the lender knows that your first mortgage will be paid before the one on a second property in the event you default on your payments.

The same goes if you choose to refinance the mortgage on an investment property that you don’t rent out. Rates will likely be higher than they would if you were refinancing your main residence.

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