Qualifying, renewing, refinancing, oh my! Mortgages can feel confusing sometimes. Luckily, it’s not always as complicated as it seems. If you’re feeling overwhelmed, there’s an abundance of resources in place to help you, including the expert advice of your REALTOR®.
Let’s break down the process of refinancing your mortgage—what it means, when it happens, and why.
What is refinancing?
Simply put, refinancing your mortgage is the process of breaking your current mortgage agreement and starting a new one. It’s essentially a “restart” button you can press to change your mortgage terms—including its length, rate type (fixed or variable), and your monthly payment amounts. You can change your lender, or stick with your current one. Refinancing can also be a way to access some of the equity in your home to pay for major expenses.
Brandon Banman, a financial service representative at CIBC, says refinancing is something to consider if the economy or if your life circumstances have changed since signing your mortgage.
“People choose to refinance for many different reasons,” he said. “One of the most common reasons for refinancing is to get a lower interest rate. But… maybe the kids are out of the house, interest rates have changed since you signed your mortgage, or you started a new job and have more income to pay your home off faster. Refinancing is just one way to adjust your mortgage to your current circumstances and the changing economy.”
Refinancing is a little different than renewing a mortgage. You’ll have to renew your mortgage at the end of each term unless you pay the balance in full. Refinancing can be done at any time before the end of your term since it involves breaking your current mortgage and replacing it with an entirely new one.
Types of mortgage refinancing
There are several different types of mortgage refinancing, and each approach will vary depending on your needs. Here are the most common types of refinancing options:
Rate and term refinances change the interest rate of your loan, the repayment length, or both. Reducing interest rates can lower your monthly payments or help you pay off your mortgage faster by cutting interest. Shortening your term means you might pay a little more every month, but shortens the time you’ll spend paying off your home.
Cash-out refinances allow you to access money you’ve built up from your home’s equity. You can use this to fund major home renovations, pay for education, start an investment plan, or finance any other major expenses in your life.
Debt consolidation refinance
A debt consolidation refinance is similar to a cash-out refinance, except the cash you take out of your home goes towards other debts. Since mortgage rates are usually lower than interest rates on other debts, using your mortgage to consolidate student or credit card debt can save you money in the long term.
Is refinancing right for you?
Now that you know there’s a restart button available on your mortgage, you might be tempted to press it. But before you take the leap, there are some things to consider.
Since refinancing means replacing your current mortgage with a new one, you’ll need to talk to your lender to see if you qualify. Typically, they’ll look at your debt-to-income ratio and credit score—which means you’ll need to provide proof of income, property tax bills, a notice of assessment, and other relevant documents. Your credit score may affect which rate you qualify for, so it’s a good idea to assess your financial situation before you ask your lender about refinancing.
You’ll also need a certain amount of equity in your home before you decide to refinance. Requirements will vary by lender, but most require anywhere between 15% to 20% home equity to refinance. This is why it’s better to wait until you’ve been in your home for some time before refinancing.
As with any contract, breaking it can cost you. But according to Banman, if you choose to refinance at the right time, it can still be worth it in the end.
“Talking to your lender or financial advisor before you decide to refinance is always a good idea,” said Banman. “Typically, there’s a penalty for breaking your mortgage and other closing and legal fees. The trick is not to be intimidated by those fees, especially if you’re refinancing for a lower interest rate. It might cost you some money up front but if you’ve done your due diligence, your refinance could still save you money in the long run.”
Earlier this year, the Bank of Canada hiked interest rates by a full percentage point. If you had plans to refinance this year, don’t panic just yet. Negotiation is an important part of the refinancing process, even if it’s not your favourite thing to do. If you’re near the end of your term, sometimes banks and lenders will waive extra fees, so don’t be afraid to ask them to help you. Refinancing also means you can choose a different lender if you would like, so don’t be afraid to shop around for other rates or talk to your lender about your options.