What is mortgage refinancing?
Mortgage refinancing allows you to use the equity in your home to borrow a new amount of money to finance your projects, such as a new home purchase, financing your children’s education, starting a business, etc.
It is also possible to refinance your mortgage before the end of the term.
How much can I borrow to finance my property?
Depending on your situation, you can refinance your property up to 80% of the market value of your home, while subtracting the balance of your mortgage.
Why do a mortgage refinance?
Here are 7 reasons why you may want to refinance your mortgage.
Renovate your home to gain comfort or increase its value
You can refinance your home to finance renovations. This way, you can take advantage of a lower interest rate than a credit card, a regular loan or a personal line of credit.
This type of financing is recommended if you are thinking of doing major renovations and the repayment of this loan is done over a period of up to 30 years.
Acquire a second home or make a major purchase
If you are considering purchasing a second property such as an income property (duplex, triplex etc…) or even a second home such as a cottage, then it is possible to generate your down payment by refinancing. With a mortgage refinance, you can re-borrow up to 80% of the fair market value of your property, it will then be necessary to subtract the balance of your outstanding mortgage loan from the new loan amount. This would be like refinancing to take out equity that you could use for a down payment on your second home or a down payment on your cottage.
You will then pay off the new mortgage, which is the total amount including the additional amount. But in some cases, the two loans are separated into separate tranches.
Free up funds for your children’s education
Refinancing your home also allows you to free up funds to finance your children’s education. A practical solution given the high cost of education.
Consolidate your debts to save money
With a mortgage refinance, you can combine all your debts into one mortgage by using debt restructuring. This will free up funds to pay off the majority of your personal debts, such as :
- the car loan
- the personal loan
- personal line of credit
- credit card
This method allows you to combine these debts into one monthly payment with a lower interest rate and an amortization of up to 30 years.
Refinance to invest for retirement
It is possible to use mortgage refinancing to prepare for retirement.
There are many products available to do this and it is important to make arrangements while you are working. Don’t forget that to obtain a mortgage, employment income is essential. Waiting for your pension and no longer having the income may limit your options.
It is therefore important to get advice from a broker beforehand.
Refinancing for retirement (RSP)
Refinancing your home also allows you to invest in your RSP.
By freeing up funds through refinancing your home, you will get a tax deduction. This option should be evaluated beforehand.
Benefit from a lower interest rate
Refinancing your home also allows you to benefit from a lower interest rate than the one you had when you signed your mortgage. If interest rates have gone down since you signed your mortgage, then refinancing your mortgage is an attractive way for you to save money over the long term, or in some cases increase the amortization period to reduce payments.
Advantages and disadvantages of mortgage refinancing
Benefits
The benefits of mortgage refinancing are:
- quick access to your home equity
- consolidate your more expensive debts
- take advantage of a better interest rate if mortgage rates are falling
- Extend the amortization period to reduce payments
Disadvantages
The disadvantages of mortgage refinancing are:
- you extend the time it takes to pay off your mortgage while increasing the amount of your mortgage
- your outstanding mortgage balance may be higher
- you may have to pay additional costs such as prepayment fees or notary fees.
How much does mortgage refinancing cost?
Applying for a mortgage refinance involves different costs.
If you decide to refinance your mortgage, you will have to pay :
- legal fees / notary fees.
- penalty fees with your current financial institution.
The appraisal fee for your property is often paid by the financial institution that is refinancing your mortgage.
Mortgage refinancing penalty
It is very likely that you will have to pay a penalty for refinancing your mortgage before the end of your original mortgage term. In Canada, lenders calculate these penalties in two ways:
- 3 months interest
- according to the interest rate differential (ETI)
The choice of penalty calculation will depend on your lender, your mortgage product and the term of your mortgage.
Steps to a mortgage refinance
1. Define what you want to do
Determine what you want to do with the funds released through mortgage refinancing: financial investments, renovating your home, paying for your children’s education, consolidating your debts, etc.
2. Let’s talk about your options
Choose between a mortgage or a line of credit.
3. Let us handle your mortgage refinancing application
Based on your wishes and options, our brokers determine the amount you can borrow in the best configuration and according to your needs.
What do I need for a mortgage refinance?
To grant a mortgage refinance, we must analyze 4 elements:
Proof of your income
You must provide proof of income in order to refinance your mortgage. This can be done by providing a pay stub and a letter from your employer.
Evaluation of your property
Your mortgage refinancing application must be accompanied by a property appraisal to determine the condition of your home and its value.
Information on your credit
You must also bring all your credit information.
Your assets and liabilities
Establish your assets and liabilities. This will allow the lender to see your assets and remaining debts in order to approve or not your mortgage refinancing request.
Solutions for refinancing your mortgage
There are 3 ways to refinance your mortgage:
Using a mortgage line
The mortgage line of credit is an appropriate solution if you prefer to have flexibility in your repayments because you determine the frequency and method of your payments.
The financing you will obtain through the line of credit cannot exceed 65% of the purchase price or value of your home.
Take out a fixed or variable rate loan
If you are taking out a mortgage, you need to make a choice between a fixed or variable rate. If you want to protect yourself from fluctuations, a fixed-rate mortgage is ideal. If you have a good financial tolerance, you can choose a variable rate mortgage.
Take advantage of the evolutionary clause
The evolutionary clause allows you to benefit from the possibility of re-borrowing the capital that you have already repaid. It works the same way as a classic loan but with a more advantageous rate.
Mortgage refinancing vs. home equity line of credit
You can access the equity in your home by refinancing or taking out a home equity line of credit. But what’s the difference between the two?
A home equity line of credit is a revolving loan that allows you to borrow money, pay it back and re-borrow up to your maximum limit. While a mortgage refinance is a new mortgage that you take out while paying off your original loan.
Mortgage refinancing – FAQ
When to refinance your mortgage?
The best time to refinance your mortgage depends on your situation and your needs.
The best times to refinance your mortgage may be when you want to:
- buy a second home or a cottage
- carry out renovations
- consolidate your debts
- financing your retirement
- pay for your children’s education
- invest in a new project
- start your business
- A need for liquidity
Mortgage refinancing before term: a good idea?
If you are not in a hurry, then it is advisable to refinance your mortgage close to the end of your loan to avoid any legal fees or penalties. The more you pay off your mortgage, the more you can borrow again.
Except in specific cases, it is not advisable to refinance your mortgage early.
How long does it take to refinance a mortgage?
It takes about 3 to 4 weeks to complete a refinancing application. It is therefore important to be ahead of the game.
However, when time is of the essence, it is possible to ask your current bank to transfer your open rate loan while you complete the refinancing procedures with our mortgage brokers.
Can I refinance my mortgage with the same lender?
You can refinance your mortgage with the same lender, but you are not required to use the same lender. We recommend that you use a mortgage broker who will suggest the lender with the best mortgage solution for you.
Refinancing or Remortgaging: What’s the difference?
There is no difference between refinancing your property or remortgaging your home.
Notary fees for mortgage refinancing ?
The notary fees for a mortgage refinancing vary on average between $800 and $1200.
Mortgage refinancing bad credit
Yes, you can refinance your home even with bad credit. However, there are several things you need to consider beforehand:
- your application must be attractive
- continue to build equity in your home
- determine your break-even point
- use the loans offered by the government
- have realistic expectations
- Take steps to improve your credit rating quickly.
How much is my property worth?
There are several methods to determine the market value of your property. We advise you to use a real estate broker who will allow you to determine the value of your home based on recent sales in the area.
How many times can I refinance my mortgage?
In principle, there is no limit to refinancing your property. However, be aware that your credit report will be consulted by the lender for each refinancing request. If there are too many applications, your credit file may be affected.
Should I refinance if interest rates are low?
Using mortgage refinancing when the interest rate decreases allows you to get a better rate. So in principle yes, but don’t forget to take into account the additional costs such as prepayment fees.
