Choosing to refinance your mortgage isn’t a quick decision for any homeowner. If you need to take equity out of your home to consolidate debt or want to secure a lower interest rate – refinancing may be your best option. But how do you know you’re making the right choice for your finances?
Get a Better Mortgage helps you with your home refinancing needs.
Refinancing can feel overwhelming, but it doesn't have to be. Here's exactly how the process works.
How to Refinance Your Mortgage
Refinancing your mortgage requires careful planning and analysis of your current financial situation. Mortgage refinancing involves breaking your current mortgage contract and starting a new one.
What to Know About Refinancing
When you refinance your mortgage, you pay off your existing mortgage early (like selling your home) and start a new mortgage with a new lender. This decision shouldn’t be taken lightly, as it often includes large penalties and fees to refinance your mortgage.
Costs and Penalties to Consider
Refinancing your home comes with several costs, depending on where you are in your mortgage contract term and other conditions around your refinancing. Prepayment penalties, legal fees, discharge fees, and registration fees are some of the most common fees you could be charged.
A prepayment penalty is a penalty you have to pay for breaking your mortgage term. It’s the amount of money you pay when you refinance your home or exceed your mortgage contract’s annual prepayment limits. The amount of the prepayment penalty is determined by whether you have a fixed or variable interest rate.
With a fixed-rate (closed) loan, the prepayment penalty is based on:
3-months’ interest on the prepaid amount.
The lender's interest rate differential (IRD): the gap between your current contract rate and the lender’s rate.
With a variable-rate (closed) mortgage, the prepayment penalty is commonly based on:
3-months’ interest on the prepaid amount.
Your prepayment penalty can range from hundreds to thousands of dollars, depending on the lender, mortgage terms, and mortgage type. Determining your potential prepayment rate is vital before you start refinancing your mortgage, as is understanding other fees you’ll owe your lender, lawyer, and bank.
If you have a fixed (closed) mortgage rate, you’ll incur the repayment penalty and fees. If you have an open mortgage rate, you’re free to pay back your loan without any extra penalties or fees, although an open rate has a higher interest rate. If your mortgage term is up for renewal when you decide to refinance, you don’t have to pay a repayment penalty.
Discharge fees are charged if you switch lenders. While every province has different fee structures, they usually range from $75 to $300.
Part of the refinancing process involves your lender removing the mortgage amount from the title of your property and re-registering it as a new property. Whether you change lenders or not, you have to pay the registration fee, which is determined by the province you live in.
Legal fees are charged by your real estate lawyer. These fees (approximately $700-$1,000) include a lien check, mortgage loan review, and the registration of your new mortgage.
When Refinancing Makes Sense
There are many benefits to refinancing your mortgage, including:
Access to your home’s equity (dictates your borrowing power): you can often borrow up to 80% of your home’s equity.
Debt consolidation (roll high-interest credit card debt and other unsecured loans into your mortgage).
When you need a lower monthly payment (which equals a longer amortization period).
Mortgage rates fall significantly.
Refinancing and The Mortgage Stress Test
A mortgage stress test is conducted when your potential mortgage lender needs to know if you can make your mortgage payments if your mortgage rate increases. This is not performed if you are renewing your mortgage, only if you’re refinancing or you’re applying as a first-time home buyer.
The mortgage stress test is part of a typical mortgage application and consists of looking at the consumer's debt service ratio, which compares your monthly debt payment and housing expenses with your gross household income.
Also, keep in mind that you can use the Canada Mortgage Affordability Calculator to get an estimate of what you could afford with a higher mortgage rate.
Some B-Lenders and other financial institutions may skip the mortgage stress test, but generally it’s a strict requirement for lenders to use to determine whether you can theoretically pay a higher mortgage rate.
Refinancing Done Right | We Guide You Through Each Step
Refinancing a home in Canada is often a complex process. Get a Better Mortgage guides you when you’re ready to make that decision. We are happy to answer any questions you have about the steps and rate estimates for your house refinancing. Having a plan and knowing the refinancing process is the key to a successful mortgage refinancing.
Book a consultation call with us today for a review of where you are in the refinancing process. We'll guide you through every stage of refinancing, from your first idea to closing.
