Refinancing your home loan means changing your existing mortgage for a new one. Many homeowners choose to refinance their home loans to get a better rate or increase their existing loan to withdraw some home equity. You can refinance your home loan from any bank or lender of your choosing.
In Canada, you may be able to borrow up to 80% of the appraised value of your home. However, the amount you are still to pay for your mortgage or other loans against your home will be deducted.
For example, if you would like to refinance your home currently valued at $500,000 to pay for upgrades, you still owe $100,000 on your mortgage. Should your lender refinance your mortgage to the $65,000 limit, you would owe $400,000 on your refinanced mortgage.
|
Appraised home value |
$500,000 |
|
Maximum loan you may get: |
x 80% |
|
Loan amount based on appraised value |
= $400,000 |
|
Less balance you owe on your mortgage |
-$100,000 |
|
Refinance credit limit |
$65,000 |
Keep in mind that the interest rate on your refinanced mortgage may differ from the interest rate on your original mortgage. You may also be required to pay a new mortgage loan insurance premium if your mortgage’s loan amount changes.
Other fees you may have to pay for a mortgage refinance may include:
- Appraisal fees
- Title search and insurance
- Legal fees
Reasons to do it
Refinancing your home loan needs thorough planning. You have to consider your personal and financial situation as well as your short- and long-term goals. There are many reasons to refinance; here are the reasons it could work for you:
- You want to take advantage of lower interest rate deals available. Taking advantage of the current lower interest rate deals is a fantastic reason to refinance a home loan. It is possible that you can reduce your interest rate by 1%-2%. A reduced interest rate will help you save more money and build your home equity a bit faster. It also means your monthly payment is reduced.
If you want to compare home loans and see if a refinanced mortgage may help you save on monthly repayment, use our mortgage calculators.
- Your property’s value has increased. Your property’s increased value makes refinancing your home loan a great move. If your home’s value has jumped, even just by a bit, it is possible to refinance and get a better rate. Banks usually give better interest rates to borrowers with more equity. To have a better look at the current value of your home, you may use the Appraisal Institute of Canada’s find an appraiser tool.
- You want to fund your home renovation. Home renos are a serious business. Canadians spent $6.3 billion on residential renovations in August 2019 alone, said Statistics Canada. Refinancing your mortgage may help you pay for renos that may have the best financial — and emotional return on investment.
Examples of renos that are more emotional than financial are adding a garage, building sunrooms, and landscaping a yard, according to the Appraisal Institute of Canada. Buyers tend to pay a little more for homes with finished basements that without.
To make refinancing your mortgage work for your home renovation, make sure to research and plan out the projected budget. Calculate how much you want to spend on the renovation and whether you can afford to repay the amount.
- You want to consolidate your debts. Looser credit requirements have made it easier for Canadians to overspend over the last few years, with an estimated 1.8 million households allocating more than 30% of their income on housing, according to BC Non-Profit Housing Association. Moreover, Canadians carry a debt load of $30,000 cash on average, according to the Credit Council Society (CCS).
Refinancing your mortgage to consolidate debt may help you repay high-interest rate debts like credit cards or car loans. Debt consolidation means combining all of your debts so you have one large repayment, instead of several.
When you refinance your home loan to consolidate your debt, your old home loan is replaced with a new one that includes repayments for your other debts. Consider the new loan term and its total interest costs when refinancing your home loan to consolidate debts.
Refinancing could help you financially. It works if it reduces your mortgage payment or builds your home equity faster. However, you must think long and hard before beginning the process. Here are a few questions you may ask yourself to determine if refinancing will suit you and your financial situation:
- Why do you want to refinance? Are you refinancing your mortgage to upgrade your property? Tap your home’s equity? Consolidate debts? Ask yourself why you want to refinance, as this option is not an escape route from your financial woes. Mortgage refinance will also require you to incur fees and other related costs that may not be worth it if you’re doing it for the wrong reasons.
- Is refinancing my best option? Research about other loan products in the market before concluding that refinancing your mortgage is the way to go. There may be other options better suited to you and what you need.
- Can I afford the repayments? A refinanced mortgage may change the amount you will owe on your mortgage, coupled with new interest rates that may apply. Ask yourself how much you need to borrow and how you plan to pay for the repayments of a refinanced mortgage. You may use our Mortgage Affordability calculator to have a better grasp of how much you can afford to borrow.
Mortgage refinancing may work for you and your financial situation. It may help you pay for upgrades or consolidate your debts. Talk to your lender to discuss your options. Alternatively, you may consult with a mortgage broker who may be able to help you find the best mortgage and rates in the market that fits your needs.
