Mortgage Refinance & Equity Assessment

Refinancing a mortgage involves obtaining a new mortgage loan to pay off your original mortgage loan. In many cases, homeowners will refinance to take advantage of lower interest rates, and often access equity to pay off other debts for investments, renovations or home improvements, or for other major purchases. A mortgage refinance could happen mid-term of your current mortgage or at maturity. It is important to understand the penalties of breaking your mortgage midterm to determine if it makes sense financially.

Refinancing a mortgage allows you to access equity (up to 80% of the current value of your home) by paying off the original mortgage you can access additional equity available to pay off debts that are often at higher interest rates or monthly payments and free up your budget to increase cash flow. You can also access equity for investment reasons, perhaps the down payment to purchase an investment rental property or invest into RRSPs. Major renovations and home improvements can be costly and borrowing from the equity in your home can be less expensive than borrowing on unsecured lines of credit or credit cards.

Refinancing a mortgage can be similar to buying a home, both start with an application and verifying income and credit to ensure you qualify to borrow the mortgage amount. From there, once we have reviewed the lenders and options, we would get a mortgage commitment from the lender which outlines the conditions for the approval. The next step would be for an appraisal to determine the Current Market Value of your home. With the mortgage approval conditions met and the appraised value confirmed the next step would be to meet with your lawyer or a closing title insurance company to review the terms of the mortgage and register and disburse the funds of the new mortgage. The original mortgage would be paid and discharged and the new mortgage registered.

Refinancing your mortgage could depend on a number of factors. Lower interest rates and an increase in home values tend to be a driving force for those looking to refinance, but an important consideration point is your current mortgage. If your current mortgage is coming up for maturity that is the optimal time as there are no prepayment penalties to worry about. If you are midterm then determining if your penalty is 3 months interest or an Interest Rate Differential penalty can be the deciding factor if it makes sense to refinance or not. If you can recoup the penalty that has to be paid with the savings in interest over the new term often it can be worthwhile. Other times the penalty may be too high and waiting until maturity may be the better decision. 

The number one downside to refinancing is that you will incur some additional costs with both the appraisal fee and the legal fees associated with discharging and registering the new mortgage. These costs are typically offset with lower interest rates and lower monthly payments of a mortgage when comparing to carrying unsecured debts, loans or credit cards. The next downside to refinancing to pay off other debts is the amortization you choose. If you keep adding additional funds to your mortgage, extending out the amortization and reusing those credit facilities, you could end up paying more in the long run. Setting your mortgage terms to your financial goals is important.

When you’re looking to refinance there are a few key things to watch out for. Know your home value and if there is equity available, your credit should be in good standing. Your income should be stable and your debt to income ratio should be in line with bank qualification requirements. The costs associated with refinancing and the break-even point to compare savings in the new mortgage to offset potential penalties to break your mortgage are all things to watch out for when refinancing.

The best place to start is with one of our mortgage agents who can assess your current situation with a credit application and your current income and mortgage statement documents. We can help you get an idea of what your home may be worth, what your penalty costs may be, and advise on the options and savings available to you.

Refinancing your mortgage will depend on the mortgage you currently have registered against your property. Some mortgages do not allow you to break midterm unless you have sold your property. Variable rate mortgages are flexible and typically only have a 3-month interest penalty, while fixed rate terms will have the greater of 3 months interest or IRD (Interest Rate Differential) penalties and each lender will have various ways of calculating those IRD penalties. If the penalties are too high waiting until maturity may be the better option.