This year has seen a rise in the number of
homeowners who are considering refinancing their mortgage. Approximately 20% of
Canadian homeowners say they plan to refinance their mortgage in the next 12 months,
according to a recent poll.
What exactly is a mortgage refinance?
Simply put, it’s the act of paying out your current mortgage and replacing it
with a new one, with different terms and a new rate.
Here are two of the top reasons why people
tend to refinance.
Reason #1: To Get a Lower Mortgage Rate
One big factor driving current borrowers to
refinance is to take advantage of today’s historically low rates.
Consider this: A homebuyer in November 2018
secured a 5-year fixed rate at then-average rates of around 3.50%. Compare that
to 5-year fixed rates refinance rates that are now around the 2% mark, and in
certain cases even lower.
The potential savings of refinancing at a
lower rate can be huge. For every $100,000 worth of mortgage, the difference between
a rate of 3.50% and 2% is $76 a month, or more than $7,000 over a five-year
term.
A downside, however, is that fixed rates come
with a prepayment penalty. In some cases, particularly for borrowers who are breaking
the mortgage early into a 3- or 5-year term, the resulting penalty could be
high.
That’s not to say the math won’t work in
your favour. You could still come out ahead over the long term, depending on your
penalty and the new mortgage rate. It’s a calculation your mortgage
professional can help with, and who will also show you the potential savings.
Reason #2: To Access Home Equity
Another reason refinancing has attracted
additional attention in 2020 is due to the pandemic. In the survey cited above,
10.2% of respondents said they plan to refinance "due to COVID-19” now that
they’re back to work.
Most Canadian lenders stepped up and
offered mortgage payment deferrals of up to six months to clients financially
impacted by the lockdown. Many of those deferrals have now ended, or are about
to in the coming months.
Additional Reasons to Refinance
There are other reasons why homeowners
might refinance as well, including:
- To lower monthly mortgage
payments: A borrower may be able to lower their monthly payments by either
securing a lower mortgage rate or by extending their loan term, which would
spread their payments out over a longer time period. This can be important for
those with a tight monthly budget and who are looking for additional financial
breathing room.
- To consolidate debt: Those with
higher-interest debt can use a refinance to roll that debt into their mortgage
at a much lower rate. This makes financial sense for anyone with sizable credit
card debt, where interest rates often run up to 20% or more.
- To finance home improvements:
Canada is in the midst of a home renovation boom as thousands of employees now working
from home are seeking ways to make their living spaces more conducive to work.
Refinancing can be an advantageous way to access funds for those improvements
at a rate much lower interest rate than a credit card or personal line of
credit.
No matter what your reason for considering
a mortgage refinance, be aware of the potential hurdles, such as penalties or
qualification criteria. If in doubt, consult a mortgage professional who can
offer unbiased advice.