If you look at the latest state statistics, you can see that home-ownership has been rising in recent years. At the moment, nearly 3/4 of families in the country have a fixed mortgage rate.
With prices of homes soring, many people have to build up equity in their homes. However, they still may feel they’re cash-squeezed. If that is the case for you, refinancing your mortgage may be an excellent strategy to lower the total monthly payments.
But is it the right time for you to refinance your mortgage? That’s what we’re going to try and answer.
The Basics of Mortgage Refinancing in Canada
If you’re like most Canadians, your existing mortgage is on a closed, five-year term and of a variable rate. That means that the interest on your loan is not fixed for the duration of the borrowing period. Instead, it’s subject to changes in market trends, and at times, this could result in higher monthly payments.
At the same time, if you have a five-year closed mortgage at 3%, today, it might be worth refinancing into a new loan that is also for five years but has an interest rate of just 2%. That’s because your existing equity in your home could qualify you for a lower interest rate on your next mortgage.
By refinancing your current mortgage, you could lower your monthly payment by as much as 20% or even 25%. You can also take advantage of an offer to agree to a fixed interest rate for the next five years.
Many Canadians are refinancing their mortgages simply because they feel this is the best time. As a result, interest rates are rising, but not enough to offset all of your savings.
If you’re thinking about refinancing your mortgage, perhaps these tips might help you decide when is the right time for you to refinance.
When To Refinance Mortgage When Interest is Rising
One of the best times to refinance your current mortgage is when interest rates rise. You might even be able to secure a better interest rate on your new mortgage as well as lower monthly payments if you have equity in your home.
In many cases, those who completed a refinance at the right time didn’t take no for an answer from lenders during their initial attempt.
Another thing to keep in mind is that it will take at least three weeks to approve the new loan. Then you’ll need to get your documents in order, including a copy of your existing mortgage, title search and other financial information needed by your lender to process your application.
When To Refinance Mortgage When Interest is Going Down
People who refinance their existing mortgage when the interest rate is going down may not see as many savings as they would if rates were rising, but they could still save $100s or $1,000s over the life of your loan. You can then use that money for other financial goals that will reap future rewards, like perhaps using it to pay off credit card debt.
The other thing to consider is that you don’t have to wait until interest rates are higher before refinancing your loan because if you do, you could end up paying more interest over the term of your new mortgage. So, for example, even if interest rates fall by 2%, there might be little incentive for you to refinance your loan.
However, if you can lower your monthly payments by $200 or $300, then it’s probably worth looking into refinancing your mortgage, even if that means you will be locking yourself into a low-interest rate for the next 5 to 10 years. Or perhaps take out another line of credit using the equity in your home as collateral.
When To Refinance Mortgage When Interest is Stable
Another time when you might consider refinancing your existing mortgage is when interest rates are stable. That could make sense because with rates remaining the same, there wouldn’t be any penalty attached to closing out an existing mortgage contract and taking on a new one should interest rates decrease further still, something which seems inevitable at this time.
Another advantage of refinancing during this period is that you might be able to replace your current fixed-rate mortgage with a floating rate. That means your monthly payment could become even less expensive if rates drop further over the next few years as expected. However, if interest rates increase, it shouldn’t have as much of an impact on your loan since you will now have a floating rate attached to your new mortgage.
Most mortgages in Canada are now either variable or adjustable-rate mortgages because homeowners feel these loans offer greater flexibility and affordability. In a rising interest rate environment, especially where money becomes more expensive to borrow, these flexible loans can help mitigate the worst effects that higher rates can cause to home budgets.
Of course, if you do decide to refinance your existing mortgage when rates are going up or down, you’ll need to make sure that the new rate is a fixed one because variable rates can fluctuate dramatically and even go up as high as prime plus 9.0%.
What You Should Know Before Refinancing Your Mortgage
Another thing to keep in mind is that refinancing your mortgage could mean an increase in your monthly payment even if you’re getting a better rate. Why? Because some lenders may also require you to pay for the appraisal, title search and other legal fees associated with closing out an existing loan contract.
Before you refinance your current mortgage, it’s worth doing some research first by getting quotes from different lenders so you can find out how much money you could potentially save by refinancing. This way, there won’t be any surprises when borrowers receive their final quote following their application process or lock-in period, which typically lasts between 30 days and six months. During that time, they cannot switch lenders without paying fees.
Closing Thoughts
With more extended amortization periods now being offered by some mortgage lenders, refinancing your existing home loan may well become an even more attractive strategy today. That is especially true now that interest rates are so low and likely to remain this way for the foreseeable future.
If you do decide to refinance your mortgage, make sure before signing on the dotted line that you’re aware of all the terms and conditions involved with closing out your current loan contract in addition to any other fees that may be associated with this transaction.
You can get in touch with our Mortgage experts for loan rates and advice. We also have more articles covering different aspects of Mortgage in Canada available at Best Mortgage Online for your reference.