Is now the right time to refinance? With interest rates at record lows, you may bethinking about refinancingyour mortgage.
While you could realize substantial savings and other benefits, there are other factors to consider before deciding if the timing is right.
Let’s take a closer look at what you’ll need to take into account before taking the leap.
You’ll have to pass the stress test
In January 2018, the Government of Canada launched the mortgage stress test rules. If you’re refinancing, you’ll need to prove you can afford payments at a qualifying interest rate which is usually higher than the actual rate in your mortgage contract.
Federally regulated lenders are required to perform the stress test and the qualifying rate your bank will use depends on whether you have mortgage loan insurance or not.
If you have mortgage loan insurance, the bank must use the higher interest rate of either:
If you don’t have mortgage loan insurance, the bank must use the higher interest rate of either:
Remember: Refinancing is not the same as renewing; it’s an entirely different deal than your original mortgage, which is why you’ll have to pass the test. Essentially, refinancing is like signing up for a new mortgage.
If you’re thinking about renewing or refinancing your mortgage in the future, check out the Borrowell Mortgage Coach to find the best mortgage for you based on your unique credit profile.
Are interest rates low enough to cover hidden costs?
Who doesn’t get excited at the idea of lower mortgage payments? But don’t let that excitement have you leaping into a refinancing deal because an interest rate seemslow. Financial institutions often attach closing costs, prepayment penalties, discharge fees, registration fees and more.
By taking the time to do some prep work, you’ll be able to figure out if a low-interest rate is worth it or not.
You want to take advantage of a higher credit score or increased income
It’s possible that when you took out your original mortgage, your income was lower and you may have been struggling financially.
If you’ve had a change in circumstances, your stronger credit score and increased income could qualify you for a refinanced mortgage with a lower rate. The benefits could mean lower mortgage payments — further improving your credit score.
You want to switch from a variable loan to a fixed loan
With words like “slow down” and “recession” becoming standard in today’s news, it’s only natural that 83% of Canadians say they prefer ‘predictability and stability over risk’ when it comes to their finances.
“There’s a lot of noise in the market around mortgage rates, but when it comes to planning for your biggest household expense, rates should be only one part of the equation,” says Tracy Best, Senior Vice President, Mobile Advice, CIBC.
“Most Canadians believe a fixed mortgage is the way to go – especially those in the early days of paying down their mortgage or juggling household expenses,” says Best. “Conversely, for those considering a variable mortgage, they may benefit from a lower rate initially but also need to be comfortable that rates may change, potentially several times, over the course of the mortgage. If rates go up, they need to ask themselves how that might impact their lifestyle and financial health.”
Deciding to refinance and switch from a variable loan to fixed is more than an interest rate. Traditional banks can hit you with a penalty of three months’ worth of interest at the current rate in addition to other paperwork and legal fees. Not only that but you could face higher rates that are usually offered to homeowners’ that refinance.
You’d like to consolidate debt
In a survey by CIBC, 26 per cent of Canadians say paying down debt is their top financial priority for 2019.
With interest rates at all-time lows, it’s tempting to refinance your mortgage to consolidate higher interest debt such as credit cards or lines of credit. While you can realize substantial savings and benefits by doing so, it’s crucial to figure out what led to your overspending in the first place. If you don’t, you could end up in a worse spot than before: a bigger mortgage and more credit card debt to pay off.
Refinancing a mortgage to pay off debt is only useful if you understand your spending habits and change them. You’ll also need 20% equity in your home for a cash-out refinance.
The bottom line
Refinancing is a big personal finance move. It comes with its risks and its rewards. Ultimately, it’s up to you to decide whether the time is right for you to refinance. Before leaping, take time to consider what your needs and personal finance goals are.
If you’re still unsure if it’s the right decision, talk to a trusted financial advisor or bank lender and weigh the risks and realities together, and then act in your own best financial interests.
Borrowell helps people make great decisions about credit. With its free credit score and report monitoring, automated credit coaching tools and AI-driven financial product recommendations, Borrowell empowers customers to improve their financial well-being and be the hero of their credit. Join the over 900,000 Canadians that have received their free credit score from Borrowell today!