Why should you learn about refinancing your mortgage? That’s simple: because it can potentially save you money, reduce your monthly payments and increase the rate you build equity. Did that get your attention? Great! Because today, we’re going to teach you all about it. You’ll learn what refinancing is, reasons you might want to do it and figure out if it’s worth it for you. Let’s get started!
It works like this: when you refinance your mortgage, you’re effectively paying off the full amount of your mortgage and taking out an entirely new mortgage at a new rate and term. There are some fees for breaking your current mortgage contract, but in some cases the long-term savings can outweigh the penalty costs.
There are several reasons why you might want to consider refinancing your mortgage:
This is the most common reason people choose to refinance. Say you notice that interest rates have dropped significantly since you opened your mortgage. At that point, you might want to see if there’s money to be saved by switching to the lower rate. Or, perhaps you have a variable rate mortgage and think interest rates are headed up. In that case, you might want to lock in at a lower rate in a fixed mortgage for a longer term.
Over the course of your mortgage, you’ll build equity in your home as you make payments and it increases in value. To figure out how much, simply subtract the amount remaining to be paid on your mortgage from your house’s current value. You may want to access this equity to pay for a renovation, free up money for an investment or pay for your child’s education.
If you have several loans, it can make a lot of sense to consolidate them, all in one place for a longer term. Essentially, you could add your auto loan, line of credit and credit card debts to your mortgage. Then you just have one payment to make, usually at a more favourable rate.
If you’re refinancing to save money with a lower rate, you simply have to weigh the costs of refinancing against the potential long-term savings. Historically, the rule of thumb is that it’s a good idea if you can reduce your interest rate by around 2%. But every case is different, and it pays to do the math.
First, let’s look at the costs of refinancing your mortgage. It depends on when you’re refinancing and if you’re changing lenders. Extra fees can include: (1) a mortgage pre-payment penalty, (2) a mortgage discharge fee, (3) a mortgage registration fee and (4) legal fees.
A mortgage pre-payment fee is charged if you end you mortgage contract early. If you have a variable-rate mortgage, the fee is typically 3 months’ interest. If you have a fixed-rate mortgage, the fee is typically 3 months interest plus the interest rate differential. It’s important to note that you do not have to pay a pre-payment penalty if you’re refinancing when your mortgage is up for renewal.
The mortgage discharge fee only applies if you’re switching lenders. Every lender set their own rates, but they typically range from $75 to $350. To avoid this fee, stay with the same lender.
The mortgage registration fee, on the other hand, is unavoidable. It’s the cost associated with your lender removing the current mortgage amount from the title on your property and re-registering it with a new mortgage. The registration fee varies by province but is typically around $70.
Finally, when you refinance your mortgage, you’ll have to consult a lawyer to review your mortgage loan, register your new mortgage and conduct a title search. This will result in some legal fees, which can range from $700 to $1,000.
Once you have all your costs calculated, it’s time to see if it’s worth it for you to refinance. There are many online calculators that can help you figure this out. But essentially, you’ll need to compare the amount you’d pay over the course of your original mortgage, with the amount you’d pay over the course of your new mortgage after the refinancing fees added. If you’re still paying less with the new, refinanced mortgage, then it's worth pursuing.
Before you do anything, we suggest that you to speak with a Northern financial advisor. They can double check your math, confirm the correct fees and guide you through the process. As always, we’re here to help—especially when it comes to saving our members money.