Perhaps you personally know people who currently have low mortgage rates and are enjoying lower monthly payments after reviewing their mortgages and taking advantage of the all-time low rates offered a few months ago. It’s natural to be envious of their situation, but does that mean you will reap the same benefits? With all of the hype surrounding it, jumping on the mortgage refinancing wagon seems very appealing indeed.

Early refinancing has become a bit of a trend; a trend that certainly isn’t surprising. Fear may very well be a big motivator, especially at a time of economic unrest. Everyone is looking to save money where they can. Obtaining a new loan with better interest rates for your home could mean saving money on monthly mortgage payments or using the extra money on other projects such as renovations or investing.

But, while getting in on the benefits, and in turn, gaining a better night’s sleep knowing your payments are lower for a chunk of time seems appealing, you may want to postpone making an appointment with your financial institution until you have determined if a new loan is right for your particular situation. After all, the decision to break an existing mortgage should not be taken lightly. You should know that, regardless of what the benefits look like on the surface, there are penalties associated with
mortgage refinancing; penalties that could leave less change in your pocket than you had expected.

Before you sign any papers, do your research and speak with your mortgage broker. If now isn’t the time to refinance, keep in mind that mortgage brokers can review your mortgage at any time so don’t think there is nothing you can do about your mortgage as it matures. For now, ask your broker to conduct a mortgage analysis to determine if renewing your loan at a lower rate is worth it.

What are the penalties?

Until recently, the main penalty you would ever have to pay was three months interest, but now that many people are locked into a fixed rate mortgage, institutions use a formula called Interest rate differential (IRD) for prepayment penalties. The calculation of your penalty using IRD involves the percentage difference between your current and new lower rate times the number of months left in your mortgage. In other words, this could be expensive.

According to Dan Eisner, senior mortgage specialist with True North Mortgage, “Refinancing to achieve a rate reduction is not for everyone; firstly, you must have at least 5% equity in your home. Secondly, the method a bank uses to calculate the IRD penalties vary and the resulting penalty may be too high to make the process worthwhile. Thirdly, you must re-qualify for the mortgage.”

Yes penalties can get costly, but that doesn’t mean it’s not worth looking into. In order to keep your business, financial institutions can take 15% off the balance of your mortgage to calculate the penalty, rather than using the full amount; thus, lowering your overall penalty fee. Or in some case, banks will offer a blended rate for the remainder of your mortgage period. Your penalty really does depend on your lender so it is wise to negotiate.

What is a blended rate?

A blended rate combines your present mortgage at its existing rate with any additional money you borrow at the current rates. Doing this allows you to take advantage of existing lower rates without having to pay a penalty.

Be warned however, that some financial institutions may be using posted rates, rather than the lower rates to calculate your new blended rate. So be sure to ask if the rates being used are the discounted rates. It is also wise to shop around and ask your mortgage broker if you are being offered the lowest mortgage rates available.

Whether you choose to refinance your mortgage, go with a blended rate to take advantage of some of the lower rates available or stick with your current rate, you should be looking long term rather than short term. As Eisner states, “We recommend taking a variable rate mortgage to take advantage of the recent prime rate reductions but we believe in the long run it will be wise to lock in your rate.”

No one can predict where interest rates will be five years from now. Therefore, it may be wise to lock in on the current low interest rates available – if you are nearing the end of your term. Otherwise, take time to do the math to determine if the penalty equals less than the money you are hoping to save. If you and your mortgage broker determine that long term savings outweigh the penalty, taking advantage of the current low interest rates may be something you shouldn’t pass up.

Caroline
PR@RateSupermarket.ca

Mortgage refinancing is the process where home owners can pay off their existing mortgage and any outstanding claims against the property and then set up a new mortgage. There are many reasons why you may want to consider this option such as if current rates are lower than your existing mortgage or or if new products have come onto the market which are a better fit for your personal situation and circumstances. If that’s the case then it might be worthwhile to calculate the total costs savings versus the benefits to consider mortgage refinancing. It is a good idea to review your mortgage annually, even if you are in the middle of your term (such as year 3 of a 5 year fixed rate deal) as many homeowners needlessly spend thousands of dollars on their mortgages that could be spent on other things.

A good mortgage broker can help you with this decision as it is complicated, especially with the recent developments that have affected world markets, and mortgage shoppers can expect a more difficult time in applying for mortgage refinancing in the upcoming months.

The Benefits of Refinancing

Refinancing is very beneficial for borrowers and there are many reasons why you may opt for it as it can enable reductions in mortgage rates and monthly payments and provide extra cash for capital to buy investments, purchase an investment property, finance your children’s university education, renovate your home or for debt consolidation.

Refinancing to buy other investments

One of the ways you can use refinancing to improve your financial situation is to take out the equity in your home and purchase other investments or swap your debt to transfer non tax deductible debt into deductible debt. This is obviously quite complicated so a good financial planner or mortgage broker will be able to help you with this. If this is done properly you can benefit by reducing your monthly payments or make some of your mortgage interest payments tax deductible, sometimes resulting in tax cuts of almost 50% for high income earners.

Debt Consolidation

Another huge benefit of mortgage refinancing in Canada is to use these additional funds to pay off some of your other monthly bills if they have gotten out of control, or even consolidating these debts into one payment at a lower interest rate. This will decrease your monthly payments and help you to get your debt under control so you can get back on your feet and a mortgage broker can help you with this as well.

Refinancing two mortgages into one mortgage

If you are among the estimated 10% or so of Canadians who are lucky enough to own 2 or more properties, or find yourself in a situation where you have two home loans on the same property such as a mortgage and a secured credit line, you can actually combine them into a new mortgage providing the total amount does not exceed 90% of the property’s value. If the new mortgage is over 75% of the property value, normal high ratio insurance and guidelines apply. This can help with your cash flow and access funds from the home or homes equity for personal use or investing.

Increase the Odds of Securing Mortgage Refinancing

With lenders in Canada tightening lending criteria for refinancing applications, how can you improve your chances of getting refinancing? Here are some pointers you should remember when applying for a refinancing loan.

1. Make sure your credit report is cleaned up

Having negative entries on your credit report , as we outlined here, can adversely affect your chances of getting refinancing.

Make an effort to thoroughly clean up your credit report so that you will have greater chances of qualifying for refinancing. Keep in mind that having a number of negative entries could result in a low credit score, preventing you from getting the right type of loan you desire.

In addition, make sure that you have a creditable financial standing by keeping your outstanding debt low. Your application for loan refinancing would have a greater chance of getting approved if you have a low ratio of debt to income. You can achieve this through several ways. For instance, if your credit card debt has reached more than three-quarters of its credit limit, then you might have to pay your outstanding debt or have it transferred to another credit card that charges a lower interest rate.

2. Be transparent in your refinancing application

Provide all the relevant information to your lender so that your broker can work out the best deal for you. While you might expect your broker to give you the best terms and conditions, do not expect this to happen unless you divulge as much information as you can on your credit history and your current income.

3. Compare mortgage rates

From there, you can pick the lender offering the best rates under the clearest terms. Read the T&C’s carefully and make sure that the agreement does not have any hidden costs that can surface only after you sign the deal with your creditor, and be sure to compare mortgage rates to ensure you’re getting the best deal and not overpaying when you don’t need to!

The very flexible rates and terms involved—some stretch up to 35 years— can make mortgage refinancing in Canada very attractive. It enables borrowers to put the equity in their homes that they have built up over the years to work and purchase property investments or to make a down payment on an investment property. During your next annual mortgage review, you may want to consider mortgage refinancing and be sure to get a trusted specialist to help you out.