Refinancing your home mortgage in canada is a typical move to make as interest rates change – which is probably the main reason. But it’s important to know what you’re getting into and whether the new mortgage is worth it before locking yourself in for another five or ten years.
Mortgage Refinancing explained
You’re essentially breaking your existing mortgage contract and replacing it with a new one when you refinance. You want to get a lower interest rate so you can pay less in monthly payments or have the same amount of money at your disposal each month, but without having to break the terms of your mortgage agreement.
Most people refinance their mortgages because interest rates are lower than their current mortgage rate.
There are different types of mortgages you can refinance. If you’re renewing your mortgage, it’s likely your term length is up, and you’re facing a penalty for changing lenders. Instead, look into refinancing so that you can stay with your current lender or try another one without penalty.
If you already have a pre-approved rate, this is the lowest interest rate and perhaps the only chance to get an even lower rate than what’s been previously offered.
Your lender will ask for details about your income and savings to determine whether they’ll approve the new loan at that rate or not. It depends on individual circumstances such as employment status and credit history.
Top Reasons to Refinance a Mortgage in Canada
There are many benefits to refinancing your mortgage. For example, you can get a reduced interest rate or consolidate debt. The following list provides the top reasons why people refinance their mortgages:
- Lower Interest Rate: This is one of the primary reasons anyone would consider refinancing a mortgage. Your lender will review your financial condition and present you with a lower interest rate if it’s warranted;
- Debt Consolidation: If you’re trying to pay off debt and improve your finances, take out a new mortgage that combines all your old debts into one, so you only have to worry about one monthly payment at a lower interest rate;
- Access Home Equity: When you refinance, you can access the equity that’s built up in your home over time. You can use it to do renovations or pay for college tuition;
- Cash Out Equity: While this isn’t recommended unless you need the money since it puts your financial stability at risk, it is an option if you want to take out extra cash;
- New Lender Relationship: You usually have better terms and conditions with a new lender than your existing mortgage.
When is the Right Time to Refinance Your Mortgage?
Refinancing your mortgage is a big decision. You don’t want to rush into it without weighing the pros and cons of refinancing versus renewing your current mortgage.
If interest rates are lower than what you’re currently paying, that’s a good indication you should refinance. Likewise, suppose you have an adjustable-rate mortgage that rises with interest rates. In that case, this might be a time for you to consider refinancing as well since banks usually offer lower interest rates on variable mortgages when they adjust them from their highs.
Before signing on any new loans or taking out cash for any reason, make sure you can afford your loan contract’s new terms and conditions. It may seem appealing to consolidate debt or a reduced rate when interests are high, but you could risk becoming delinquent on your payments if interest rates ever go down and you can’t keep up with the new terms.
Can You Refinance Your Mortgage If You Have Bad Credit?
It’s not impossible to refinance a mortgage even when you have bad credit. That said, it won’t be easy as lenders would look at many factors, such as your debt-to-income ratio and capacity to repay the loan before they approve or deny loans.
If you want to refinance a mortgage with bad credit, start applying for personal unsecured loans. This way, your poor credit history will be tied up with other forms of non-mortgage debt that might not reflect poorly on you.
You may also need to find high-interest loans to pay off your old debts before you can consolidate them into a lower-interest loan. Doing this might not be an option for everyone, but if you have the means and it will help improve your credit score in time for refinancing, it’s something to consider.
How to Refinance Your Mortgage in Canada
Following a few tips can help you refinance your mortgage successfully. For example, shop around before accepting the first offer from a lender and be prepared to negotiate terms if possible.
Refinancing a mortgage is not an overnight process – it can take up to six months for lenders to review your application and approve or deny your request for refinancing. As such, careful planning ahead of time will help the process move as smoothly as possible.
When refinancing a mortgage in Canada, you’ll need proof that there won’t be any gaps in your payments due to switching lenders. However, since most people make changes to their mortgages when they renew their loans, this isn’t usually a problem because you’ll have automatic payment withdrawals set up with your new lender by then.
However, if you’re switching lenders outside of renewal season or are coming to the end of your mortgage term, you’ll need to prove that you have other forms of income if there’s a problem with getting automatic payments set up.
If you don’t show proof that your credit score will allow for an automatic payment plan, your lender might require upfront monthly installments until they can establish whether you can make the required payments on time each month. If your credit score is borderline and this option isn’t available through your current lender, refinancing might not be an option for you.
Improve Your Financial Situation Today!
After paying down your debts, ask your existing lender about the chances of getting a reduced interest rate or being approved for a refinance without excellent credit. You may have to shop around for an alternate lender first and then reapply with your current mortgage company once you’ve paid down other debt and improved your financial situation by other means, such as building savings.
Explore Best Mortgage Online for more mortgage topics. You can reach us at 1-855-567-4898 (toll free) for more mortgage advice and get to know the best loan rates on the market at the moment.