18 Apr Refinancing a Mortgage in Ontario
When dealing with clients that already have a mortgage, we often encounter this questions: should I refinance my mortgage? It is something to consider, especially if rates drop. CMHC (the Canadian Mortgage and Housing Corporation) defines refinancing mortgages as a type of financing that allows homeowners to pay in full the amount of their prior mortgage by securing another loan. If interest rates have dropped since a homeowner signed a mortgage, refinancing is definitely something to consider. However, be careful when it comes to penalties. Breaking the contract for a lower interest rate can save you money over time, but that depends on the penalty you have to pay based on the size of your outstanding mortgage. So, in this case of refinancing, what factors should we be considering?
Here’s how it works: when you refinance your mortgage, you replace your existing mortgage with a new one on different terms. At this point, the process is similar to the pre-approval – you need to know if you qualify, and for that to happen your lender calculates your loan-to-value ratio by dividing the balance owing on your mortgage and any other debts secured by your property into the actual value of the property. If this ratio is below 80%, you can refinance your mortgage. Also, you will have to present documents for this process to go ahead: T4 slip, notice of assessment or a recent pay stub, a mortgage statement, a property tax bill, and savings accounts
What are the benefits of refinancing?
The most obvious one is the lower interest rates. So long as you don’t have big penalties, then this is a great benefit. As well, you can access the 80% of your home’s appraised value less any outstanding mortgages. This is money you may have for investment opportunities, home renovations, or even your kids’ education. This process is called accessing equity in your home. There is also the possibility of changing your term or getting a different mortgage. Let’s say you come across extra cash, such as a bonus at work, that you would like to put towards your mortgage, considering refinancing into a term with more prepayment privileges may be a good option. See our post on open mortgages.
There are a few refinancing options available when considering a refinance which include: breaking your existing mortgage contract early (in case of lower rates), adding a home equity line of credit (see our post on Heloc), or by blending and extending your existing mortgage (a “blend” of your current mortgage rate plus any additional money you borrow at current market rates).
In summary, remember the following points: decide if you need to apply for a loan, analyze your situation and determine if refinancing is your best option, assess your situation and ensure you can afford the monthly payments of a refinanced mortgage, make sure you know your credit score, AND make sure you know your refinancing mortgage options (such as the Heloc, the second mortgage, and so on).