Refinancing a mortgage is a way to secure new mortgage terms, a lower interest rate or allow you to access home equity as cash.
The mortgage refinance process is quite similar to getting a purchase mortgage, only there won’t be a new house to move into.
Knowing how a mortgage refinance works, and how to find the best refinance rates, will help you decide if it’s the right tool for managing your mortgage.
How a mortgage refinance works in B.C.
To refinance your B.C mortgage, you’ll use a new mortgage to pay off your current mortgage. You can choose to refinance with the same lender, or use the opportunity to shop for a new lender.
When refinancing, you may have the option to borrow more money than you need — resulting in a new mortgage with a higher balance than your old one. These extra funds can be paid out as cash that can be used to finance home improvements or pay down high-interest debt, for example.
Unlike some instances of renewing a mortgage in B.C., refinancing requires you to requalify for a new one. To be approved, you’ll need to provide the following:
- Personal information, such as your identification and social insurance number.
- A letter of employment and/or proof of income.
- Tax documents, such as your notice of assessment from the last few years.
- Financial details, including any existing debt and assets.
- Recent statements from your bank account and investments.
Besides these details, your new lender will also want to look into a few additional things:
- Home value. An appraisal will be ordered to determine the current value of your home. The homeowner usually bears the cost.
- Debt service ratios. The lender will want to ensure that you fall under the recommended gross debt service (GDS) and total debt service (TDS) ratios.
- Credit score. An updated credit check will likely be performed to see how your credit score and history look.
- Mortgage stress test. To be approved for a mortgage with a federally regulated lender, you must pass the stress test to ensure you can afford the new contract terms.
Reasons to refinance a mortgage
The idea of breaking your existing mortgage contract may not feel comfortable, but there are various reasons why you may want to consider refinancing.
The most obvious reason to refinance your mortgage is to take advantage of lower interest rates. For example, let’s say your current mortgage rate is 4.5%, but rates have fallen, and you can now get a mortgage for 2%. Even though you’d have to pay a penalty to break your existing mortgage, the money you save over your mortgage term could more than offset the cost.
Nerdy Tip: When refinancing your mortgage, remember you’re renegotiating your entire deal. Besides a lower interest rate, you could also get better terms, such as increased pre-payment options.
Lower monthly payments
When refinancing a mortgage in B.C., you can opt for a longer amortization period. Although this means you’ll pay more interest in the long run, it could reduce your monthly payment amount.
It’s worth noting that some banks have recently allowed homeowners to extend their amortization period without formally refinancing. In addition, some lenders are permitting periods that exceed the usual maximum of 30 years.
Turn equity into cash
Another common reason for refinancing is to unlock the equity you’ve built in your home. Equity is the difference between the current value of your home and how much you owe.
For example, if your home is worth $500,000 and you owe $100,000 on your mortgage, you have $400,000 in equity.
By refinancing your mortgage, you could access that cash for other purposes, such as:
- Home renovations.
- Debt consolidation.
- Buying an investment property.
- Starting a new business.
- Retirement savings.
- Education savings for their children.
How much can you borrow by refinancing in B.C.?
The amount you can borrow when refinancing in B.C. depends on how much equity you have in your home.
Although you can borrow up to 80% of the appraised value of your property, you need to subtract the balance of your mortgage and any outstanding loans against your home.
For example, Let’s say your home has an appraised value of $650,000. You could borrow $520,000 since that’s 80% of the value. However, if the mortgage remaining on your property is $400,000, you could only access $120,000 of your equity.
The cost of refinancing a mortgage
Refinancing a mortgage in B.C. is not free. It could cost you a few thousand dollars. Some fees you need to consider include:
- Legal fees. This is the cost of your real estate lawyer’s services. Any fees that your lawyer incurs, such as a title search, title insurance and registration, would be charged back to you.
- Home appraisal. An appraisal may need to be done to determine your home’s value.
- Prepayment penalties. A prepayment penalty would apply since you’d be paying off your original mortgage. How much you’d pay would depend on how much money owing you have left, the remaining term of your mortgage, and the formula used.
- Discharge fees. If you’re changing lenders, a discharge fee may apply, though in some cases the new lender may cover the fee, so ask.
When to refinance your mortgage
Although you can refinance your home whenever you want, there are a few occasions when the timing may be ideal.
- Interest rates have dropped. Even when factoring in fees, refinancing could save you money in the long run if mortgage rates have dropped significantly.
- When your mortgage is near your renewal date. Refinancing near the end of your current mortgage term is a good strategy since the prepayment fee may be lower.
- You want to invest. Funds from refinancing could be used for home renovations or buying an investment property.
- You want to reduce your debt. Anyone with high-interest debt, such as credit card debt or an auto loan, could consider refinancing to take advantage of lower rates.
Is refinancing your mortgage a good idea?
In the right situation, refinancing a mortgage in B.C. could save you money.
Homeowners on a fixed-rate mortgage who have seen interest rates drop significantly could refinance to a lower rate. Alternatively, if you’re on a variable-rate mortgage and interest rates have increased, refinancing to get a fixed rate could be worth it, as it’ll prevent your rate from going any higher and give you peace of mind.
Refinancing could also make sense if you have limited savings but lots of home equity, since refinancing may allow you to unlock those unds for use on other priorities.
You may want to avoid refinancing if it will cost you more than you will save. Those costs could be in the form of prepayment penalties, a mortgage discharge and a longer amortization period.
Pros and cons of refinancing a mortgage
- It could save you money.
- Allows you to access your home’s equity.
- Consolidate debt with a lower interest rate.
- You’re borrowing from yourself.
- There are costs to refinancing, including prepayment penalties or a mortgage discharge fee.
- It may take longer to pay off your mortgage balance.
Alternatives to refinancing your B.C. mortgage
Refinancing a mortgage isn’t the right choice for everyone. Fortunately, there are a few other options available.
- Blend and extend. Some lenders allow you to extend your existing mortgage. They would blend your existing mortgage rate with current interest rates. This benefits homeowners by getting them a lower interest rate without paying prepayment fees.
- Home equity line of credit. With a HELOC, you can borrow up to 65% of the appraised value of your home. This is similar to a personal line of credit, where you can access the funds as needed. This option may have lower rates and fees than refinancing.
- Home equity loan. This second mortgage registered to your home pays out a lump sum. There are no prepayment penalties, but interest rates on home equity loans tend to be high and there will be set up fees and a defined term to repay the loan.
Frequently asked questions about refinancing a mortgage in B.C.
You can only refinance for up to 80% of the appraised value of your home. Since this would be considered a new mortgage, lenders will want to verify things, such as:
- Your income and employment.
- Credit score.
- Debt service ratios.
- That you can pass the mortgage stress test.
When reviewing your refinancing application, B.C. lenders will conduct a hard inquiry on your credit report. That will usually result in a slight but temporary drop in your credit score. If you choose to borrow more than your current mortgage balance, it will increase your credit utilization ratio, which may also have a negative effect on your credit score.
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