What is the point of refinancing?

Should I Refinance My Mortgage?
Thomas Andre Fure / Shutterstock

Whether you’re looking to save on interest over the coming years or reduce your payments now, refinancing can help.

“Many Canadians are finding it difficult to manage their monthly debt payments during COVID-19,” says Reza Sabour, a senior adviser and director with the Canadian Mortgage Brokers Association of B.C.

When you refinance, you open a new, better loan and use it to pay off your existing mortgage. You’ll have to pay a penalty for breaking your old agreement, but this single financial move can make a huge difference if you’re struggling to pay your bills.

“This not only saves the client a lot of money in interest costs but could also help protect their credit score if they have fallen behind in making their minimum payments,” Sabour adds.

However, Sabour cautions against cash-out refinancing, in which you get a bigger loan than you need to cover your existing mortgage. Refinancing is not a free-for-all where you tap into your equity and live large, he says; it’s more about creating a new financial plan that will help you save and succeed.

How much home can you afford?

Whether you're hunting for a new home or looking to refinance your mortgage, knowing how much your new loan might cost you is critical. Use our handy mortgage calculator to help you understand what your payments could look like.

Get Started

How do I know if I should refinance?

Refinance Mortgage
WAYHOME studio / Shutterstock

If your mortgage rate is higher than 2.5% — or 0.75% higher than the rates you can get now — you’ll definitely want to calculate your potential savings.

Let’s imagine you have a $500,000 mortgage with a 3% fixed rate and an amortization of 20 years. The total interest you’d pay over a five-year term would be $67,490.

The interest for that same mortgage at 1.64% would be $36,497.

So by refinancing, you’d save $517 per month, $6,199 per year and $30,993 over the full length of your five-year term.

That extra financial wiggle room can free up cash for an emergency fund or help you afford the essentials while the economy — and maybe even your own job security — remains uncertain.

Unfortunately, anyone who has lost their job due to the coronavirus lockdown will struggle to qualify for refinancing. Since you’re opening a totally new loan, you have to provide evidence that you can make regular payments.

If you’re denied, you’ll need to look elsewhere for support. Lenders are allowing homeowners to defer their mortgage payments during this trying time, but it’s not a perfect solution. In most cases, those loans will continue to generate interest while on pause.

When is refinancing a bad idea?

when should you not refinance your mortgage?
imtmphoto / Shutterstock

Both Sabour and Geddes advise staying with your existing mortgage if the potential savings is less than the cost of breaking your current contract.

Penalties can cost up to 4% of a fixed-rate mortgage or three months of interest payments in a variable contract, Reza says, but you’ll have to check with your lender.

And remember that if you want a great deal, you’ll probably need a credit score of at least 660. You can check your credit score and credit report for free online; if your score is low, it’s not a bad idea to try to boost your numbers before you lock in a new rate.

Unexpected vet bills don’t have to break the bank

Life with pets is unpredictable, but there are ways to prepare for the unexpected.

Fetch Insurance offers coverage for treatment of accidents, illnesses, prescriptions drugs, emergency care and more.

Plus, their optional wellness plan covers things like routine vet trips, grooming and training costs, if you want to give your pet the all-star treatment while you protect your bank account.

Get A Quote

How do I choose the best option?

When is it smart to refinance your mortgage
Syda Productions / Shutterstock

When buying a home or refinancing, you need to think about both your income and your financial comfort zone.

Conservative personalities will prefer a fixed rate and pay a bit more for peace of mind and a predictable monthly budget. If the prime rate rises during your term, you won’t pay a penny more.

If you want the mortgage best bargain possible, a variable rate tends to be the better choice.

“From a purely math perspective, variable is the way to go right now and has generally been the product that wins the tug-of-war” when you look at trends over time, says Sabour.

If you’re flirting with a variable rate, remember that you can ask about converting to a fixed rate in the future. If interest rates start to increase during your term, Sabour says, you can make the switch without penalties or extra costs.

Major banks are offering variable rates as low as 1.34% right now, while fixed-rate mortgages start at 1.39%.

If you don't have time to hunt for the best mortgage yourself, get Homewise to work the market for you. This online brokerage will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.

Sponsored

You're 5 minutes away from the best mortgage

Searching for your perfect mortgage shouldn’t be hard. Homewise is an online brokerage that will negotiate on your behalf with more than 30 big banks and other lenders, completely free, and it only takes five minutes to apply.

If you're in the market for a new mortgage, or if you're looking to refinance before interest rates rise again, go to Homewise now and answer a few simple questions to get started.

Juliette Baxter MoneyWise Contributor

Juliette Baxter is a writer and editor who has covered everything from designer runway trends to RESPs for publications such as Chatelaine, Flare and The Globe and Mail. She also strategizes words and ideas for leading brands including Birks, RE/MAX and Shoppers Drug Mart.

Explore the latest articles

The best mortgage lenders in Canada

There is no “one size fits all” type mortgage lender for everyone. However, with a little shopping around you can find the best one for you.

Hannah Logan Freelance Contributor

Disclaimer

The content provided on Money.ca is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter. Advertisers are not responsible for the content of this site, including any editorials or reviews that may appear on this site. For complete and current information on any advertiser product, please visit their website.