Refinancing Your Mortgage

Refinancing with Justin McCallum

Any time that you change your mortgage during the current term of the mortgage, it’s considered refinancing your mortgage.

When making the decision on whether to refinance, it is best to talk with a mortgage agent, who will take your entire situation into consideration. Your mortgage agent can do an Annual Review to look for potential cost savings after factoring in the amount of the mortgage penalty. You could potentially save thousands of dollars, or it may be worth it to wait till the end of your term—it all depends on your unique financial situation.

If you do decide to refinance your mortgage, you will end up having to pay a mortgage penalty. Depending which is greater on a fixed rate mortgage, the penalty will either be three months interest or Interest Rate Differential (IRD). If you have a variable rate mortgage you will only have to pay the 3 months interest penalty. If you have an open mortgage there is no penalty, but your interest rate will typically be higher than that of a closed variable or fixed interest rate.

There are many reasons why you might want to refinance, or increase your existing mortgage, but the most common reasons are to consolidate non-mortgage debt, finance home improvements, fund college tuition or investing for retirement.

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Factors to Consider

There are many factors to consider when refinancing your mortgage. Here’s what you need to know:

Taking out equity in your home:
• Consolidate other debt
• Renovations & home improvements
• Investing for retirement

Consolidating existing financing:
• Combining mortgages
• Breaking a closed mortgage to transfer to a new lender

Consolidate other debt:
• Most unsecured debt is priced by your bank at a higher rate than your mortgage in order to compensate them for the higher risk of loss if you default
• For many people it only makes sense to use available home equity to pay out this debt, as it typically reduces interest costs significantly
• If the total of the existing mortgage and debt to be refinanced is less than 90% of the value of your home or a maximum of $200K equity, and you qualify in terms of income and credit standing, refinancing your first mortgage should be a breeze

Renovations & home improvements:
• If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized
• The insurers–AIG, Genworth and CMHC–will insure new mortgages are “topped up” for this purpose, and the total of your current mortgage plus the new funds exceeds 80% of the current home value. Of course, if the total requirement is less than 80% of your home’s current value, you should have little trouble getting the “top up” you need

Combining existing mortgages:
• Combined mortgages result in one “high ratio” mortgage
• If neither (or none) of the mortgages you’re combining was ever insured, but combining them results in a high-ratio situation, you’ll be required to pay an insurance premium
• You need to look closely at the total savings the combination will give you, in order to determine whether this is financially worthwhile

In all of these cases there is one critical consideration which causes the failure of many refinance situations, the new mortgage often requires a fraction of the cash flow previously needed to service the now consolidated debt. Many who go through this process not only absorb the cash flow savings into an improved lifestyle, they either re-incur the debt they paid out, or incur debt for which they now qualify, and sometimes both. It is important to approach such a consolidation/re-combination of obligations with the clear and focused goal of applying all savings toward paying down the mortgage. Otherwise, the new mortgage will be a burden, rather than a solution.

Breaking a closed mortgage to transfer to a new lender:
• Many closed mortgages have the feature that allows the balance to be paid out with a penalty after a certain time has elapsed on the mortgage. Check the “prepayment” clause in your mortgage to determine your own situation, or better still, call your institution and ask them the cost of paying out in full.

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