If you are thinking about refinancing your mortgage you are not alone. With interest rates as low as they are, for as long as they have been in Canada, many homeowners over the last little while have debated if mortgage refinancing makes sense for them.
What's the upside to mortgage refinancing in Canada?
It all comes down to saving money. Will you, or will you not save money by refinancing your mortgage?
There are a variety of ways that a homeowner may save money by refinancing, like:
- Getting a mortgage at a lower interest rate. If your mortgage is at a higher rate than what is available today, refinancing may make sense.
- Getting a mortgage product that offers flexibility that you do not already have with your current mortgage; this way penalties and costly interest can be avoided.
- Consolidating other debts. With rates so low, a person can refinance their mortgage to consolidate other debts that may be at a much higher interest rate.
For more mortgage savings tips read: Tips to pay off your mortgage sooner.
What are the drawbacks to mortgage refinancing in Canada?
In a nutshell, penalties. When refinancing a mortgage agreement, your lender will likely apply a penalty if you are refinancing before your term ends. Depending on the penalty, you may choose not to refinance your mortgage at all. Basically there are three types of penalties: a set flat-fee penalty, a 3-months interest penalty, or an interest-rate differential (IRD) penalty. The type of penalty you have will be outlined in your mortgage agreement.
When is a good time to refinance?
Basically it's a good time for homeowners to consider refinancing when:
- Rates are low, like they are now.
- There are savings available above and beyond just a lower interest rate. For example, if you want to be free to make lump sum payments, increase your payments or change your amortization period and your current mortgage does not offer these features without a penalty.
- You have other, high interest debts (like credit cards), that by consolidating into your mortgage will save you money.
- You want to take out equity you have built up in your home. Often, homeowners refinance because they want to take a loan out on the equity in their home to pay for renovations, start up a business, or pay for their child's post-secondary education.
Refinancing a mortgage loan
Effective July 9th, 2012, Canadians can withdraw up to 80 per cent of the value of their home when refinancing their government-backed insured mortgage. Previously, the maximum was 85 per cent.
When does it not make sense to refinance?
In Canada, mortgage refinancing may not always be the answer to helping you save money. It may not make sense to refinance if:
- The penalty incurred cannot be offset through savings.
- Interest rates are higher than when you originally obtained your mortgage.
Not sure if the time is right for you to refinance?
If you are a homeowner who is thinking about refinancing your mortgage, you can take advantage of the mortgage rate comparison service offered through Kanetix.ca to help you with your research.
Compare mortgage refinance rates to see if it makes sense for you today.
Looking for more information about mortgages and mortgage rates?