Refinancing your mortgage refers to the process of renegotiating your current mortgage agreement for a variety of reasons. Essentially, refinancing allows you to pay off your existing mortgage and replace it with a new one.
There are a variety of reasons to consider mortgage refinancing, including but not limited to:
You want to leverage large increases in property value
You want to get equity out of the home for upgrades or renovations
You want to expand your investment portfolio
You are looking to consolidate your debt
You have kids headed off to college
You are going through a divorce
You want a better interest rate
You want to convert your mortgage from fixed to variable (or vice-versa)
Mortgage refinancing can result in a host of great benefits, such as reducing financial stress and helping get you back on track for your financial future! Some of the larger benefits include:
ACCESS A LOWER INTEREST RATE
As mentioned above, one reason to refinance your mortgage is to get a better rate – this is especially true when done through a mortgage professional. On average, a DLC mortgage professional has access to over 90 lenders! This allows them to find the best mortgage product for your unique needs, versus traditional banks that only have access to their own mortgage offerings. Plus, using a mortgage expert allows you to benefit from their advice at typically zero cost to you.
CONSOLIDATING YOUR DEBT
There are many different types of debt from credit cards and lines of credit to school loans and mortgages. But, did you know that most types of consumer debt have much higher interest rates than those you would pay on a mortgage? Refinancing can free up cash to help you pay out these debts. While it may increase your mortgage, your overall payments could be far lower and would be a single payment versus multiple sources. Keep in mind, you need at least 20 percent equity in your home to qualify.
MODIFYING YOUR MORTGAGE
Life is that it is ever-changing and sometimes you need to pay off your mortgage faster or change your mortgage type. Maybe you came into some extra money and want to put it towards your mortgage or maybe you are weary of the market and want to lock in at a fixed-rate for security. Always be sure to talk to your mortgage professional about potential penalties.
UTILIZING YOUR HOME EQUITY
One of the biggest reasons to buy in the first place is to build up equity in your home. Consider your home equity as the difference between your property’s market value and the balance of your mortgage. If you need funds, you can refinance your mortgage to access up to 80% of your home’s appraised value!
As with everything, refinancing comes at a price! If you are experiencing a financial rough-patch or one of the previously mentioned situations and think that refinancing your mortgage could be the right solution, there are a few things to know.
The first and most important thing to understand about mortgage refinancing is that if you opt to refinance during your term, it is considered to be breaking your mortgage agreement. As with any contract, there are associated penalties for breaking them and it could end up being quite costly. If at all possible, it is always best to wait until the end of the mortgage term before any refinancing is conducted.
Beyond the penalties, there are a few additional things to know about mortgage refinancing such as:
It allows you to tap into 80 percent of the value of your home.
It requires re-qualification under the current rates and rules, which includes passing the “stress test” again
No default insurance is required, which could give you more lender options
There is typically an appraisal cost and legal fees for the new mortgage agreement
Talking to a Myself about refinancing can provide you access to even greater rates and mortgage plans to best suit your needs and what you are trying to accomplish through your refinancing strategy. The best part? My services won’t cost you a penny. Why wait? Lets Chat!
DO YOU AUTOMATICALLY LOOK AT A RATE WHEN CONSIDERING WHERE TO GO??
LET ME FILL YOU IN WHY IT’S NOT ALWAYS THE MOST IMPORTANT FACTOR
When it comes to mortgages, it is easy to focus on the rates and your current situation, but the reality is that life happens and when it does, rates won’t be the only thing that matters.
First and foremost, the most important thing to remember is that a mortgage is a contract. That means that there is a penalty involved if the contract is ever broken. This is something that every homeowner agrees to when you sign mortgage paperwork, but it can be easy to forget – until you’re paying the price.
Why break your mortgage?
You’re probably wondering why you would ever break your mortgage contract? Well, you might be surprised to find out that 6 out of 10 mortgages in Canada are brokenwithin 3 years and there are typically nine common reasons that this happens:
Sale and purchase of a new home
To utilize equity
To pay off debt
Cohabitation, marriage and/or children
Divorce or separation
Major life events (illness, unemployment, death of a partner)
Removing someone from title
To get a lower interest rate
To pay off the mortgage
It is always important to think ahead when signing a mortgage agreement, but not everything can be planned for. In that event, it is important to understand the next steps if you do indeed need to break your mortgage.
Calculating the Penalties
Typically, the penalty for breaking a mortgage is calculated in two different ways. Lenders generally use an Interest Rate Differential calculation or the sum of three months interest to determine the penalty. You will typically be assessed the greater of the two penalties, unless your contract states otherwise.
INTEREST RATE DIFFERENTIAL (IRD)
In Canada there is no one-size-fits-all rule for how the Interest Rate Differential (IRD) is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used.
However, typically the IRD is based on the following:
The amount remaining on the loan
The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today
In this case, these penalties vary greatly as they are based on the borrower’s specific mortgage and the specific rates on the agreement, and in the market today. However, let’s assume you have a balance of $200,000 on your mortgage, an annual interest rate of 6%, 36 months remaining in your 5-year term and the current rate is 4%. This would mean an IRD penalty of $12,000 if you break the contract.
Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.
THREE MONTHS DIFFERENCE
In some cases, the penalty for breaking your mortgage is simply equivalent to three months of interest. Using the same example as above – balance of $200,000 on your mortgage, an annual interest rate of 6% – then three months interest would be a $3,000 penalty. A variable-rate mortgage is typically accompanied by only the three-month interest penalty.
Paying the Penalty
When it comes to making the payment, some lenders may allow you to add this penalty to your new mortgage balance (meaning you would pay interest on it). You can also pay your penalty up front.
Whenever possible, if you can wait out your current mortgage term before making a change to your mortgage, it is the best way to avoid being stuck in the penalty box. If you cannot avoid a penalty, do note that, while only calculators can be great tools for estimates, it is best to call your lender or mortgage broker directly for the accurate number in the case of determining penalties.
If you are unsure about getting the best penalty terms, reach out to a Dominion Lending Centres mortgage broker today! They can help you find the best mortgage product for you.
ARE YOU TRYING TO DECIDE WHETHER YOU SHOULD RENT OR BUY? Here’s What You Need to Know!.
When it comes to the Canadian housing market, there are lots of options for where to live! From renting an apartment to owning a single-family home, it all comes down to where you see yourself living and what you can afford! The beauty is, there is no right or wrong answer when it comes to renting versus buying but let’s break down the pros and cons of both and hopefully help you to decide which is best for you!
why do people rent?
One of the most common answers to this question is affordability. Most people rent because they believe it is cheaper than owning a home. This can be true in some cases, but there are also times when monthly rent costs are higher than monthly mortgage payments. Of course, there are also cases where rent is far more affordable than buying, especially when you factor in the cost of a down payment and maintenance on a home you own, rather than one you rent. Affordability is fairly dependent on an individual’s situation, but it is not the only decision factor for choosing to rent.
Another reason individuals may choose to rent is that they simply aren’t sure where they want to live, or maybe they cannot find a place that fits their needs. If you are new to an area, you may want to rent in the meantime so you can get to know the neighbourhoods and determine which area is the right fit for you. In some cases, you simply may be unable to find a home that is affordable to buy in the area you want or within a reasonable commute from your work.
For individuals who travel a lot for work or like to be free-floating, renting can be the perfect option but if you simply believe buying a home to be out of the question, it is time to take a hard look at your options because it may not be so far fetched!
pros and cons of renting:
To help you decide if renting is right for you, we have put together a little list of pros versus cons to help you see if it is the right fit.
Pros of Renting
Cons of Renting
Less maintenance
Fewer repairs
Lower upfront costs
Short-term commitment for people unsure of where they want to plant roots
Protection from potential decrease in property values
Monthly payments may increase
Potential for being evicted / lease renewal not being approved
Paying to someone else’s mortgage instead of building your own equity
Requiring permission to paint or remodel
why do people buy?
According to the most recent data, Canada boasts an overall homeownership rate of 67.8%. Even for those Canadians aged 35 and under, more than 40% of households own their own homes. This is quite an impressive statistic! So, let’s look at why people choose to buy.
One of the main reasons that people choose to buy a home is to have the stability and peace of mind of owning the place you live. This means you are not at risk of being put in a situation where the landlord wants to move their parents into the basement suite and you have to leave or having to deal with increased costs if you go to renew a lease agreement.
For others, the benefit to buying comes in building up equity and ensuring that nest egg for your future. When you choose to rent, you are paying into someone else’s mortgage and into their future but when you work towards buying your own home, suddenly all that money you invested is going to your future instead. This is an extremely important aspect to consider in today’s age when many are having trouble with the idea of saving for retirement.
Now I get it, you may be thinking “if I can’t afford to retire, how can I afford to buy a house” but if you can afford to pay the high cost of rent in today’s market, then home ownership isn’t as far out of reach as you think. This is especially true if you buy a two-story home and rent out the basement, giving you ample living space upstairs but also additional income to pay your mortgage.
pros and cons of buying:
To further show the benefits and costs to buying, we have broken down some pros and cons to help you to determine if this is the right path for you.
Pros of Buying
Cons of Buying
Freedom to renovate or modify your home as you wish
You are building up equity in a safe, secure investment as you pay down your mortgage
Potential for additional income if you have a rental suite
Stability and peace of mind from being in control of your investment and owning the place where you live
The risk of losing your home value when you sell
Responsibility for all ongoing costs, including mortgage principal and interest, property taxes, insurance and maintenance
Monthly payments can increase if interest rates go up at renewal time
Possibility of unexpected and potentially costly repairs
to rent or buy, that is the question!
Did you know? 4 in 10 households spend more than 30 per cent of their pre-tax income on rent, which is above the commonly accepted affordability threshold.
The latest National Bank report revealed that monthly mortgage costs for median-priced condos was higher than the average monthly rent for a similar unit in Toronto, Montreal, Vancouver, Victoria and Hamilton. At the same time, monthly mortgage payments were lower than rents in Calgary, Edmonton, Quebec City, Winnipeg and Ottawa. While this data does not include suburbs, it shows a staggering difference between mortgage payments and rent payments.
If someone can rent for $900 a month or pay a mortgage of $1200 a month, it may seem like a no brainer but it is important to remember that paying rent does not build equity! However, if you are unsure of where you want to live or cannot find a suitable and affordable home with a close enough commute to work, renting may be your only option. This is where checking listings and discussing with a real estate agent may open doors and where a mortgage broker can come in handy to help you determine if purchasing a home is viable in your near future.
yes, you can buy!
The reality is that in the long run, homeowners often fare financially better than renters because homeownership enables forced savings that accumulate over the years, growing into a sizeable nest egg.
If you are unhappy renting or really prefer the idea of owning your own home, you CAN. It is time to stop assuming you cannot make the leap from renting to buying – all you need is the right information and the right preparation!
To determine if you are able to purchase a home, a good place to start is the My Mortgage Toolbox app from Dominion Lending Centers. This app is perfect for seeing what you can afford. Using the app to calculate minimum down payments and monthly mortgage costs can help you to get a good picture of the financial landscape and your options. Looking at your budget and evaluating your current rent costs and other monthly expenses can also help you to determine your affordability bracket.
Some other things to consider before buying include:
Your credit score – do you have good financial standing to be approved for a mortgage?
Your savings – do you have any money put away for a downpayment? If not, do you have wiggle room in your budget to start saving?
Your time – do you have the resources to maintain a home from the yard to any necessary repairs?
If buying a home to live in is out of the question due to the availability in your area or cost of homes close to work, another option is to consider an investment opportunity. Maybe you cannot afford to buy in the area you want so you rent in order to keep your commute short and be in a neighbourhood you love. However, you can still reap the equity benefits by investing in a vacation or rental property which would give you the necessary nest egg and help you feel more secure about your future financial situation. You could keep the investment property as long as you want! If you end up finding the perfect home in your area down the line, you could always sell your investment property and take the earnings for a down payment on the right home – or keep it as an extra security blanket!
Regardless of whether you choose to continue renting or make the leap to owning your own home, the most important factor is your financial security. What works for your friend or your parents may not work for you – and that is okay! However, educating yourself and looking into all the options will ensure that, at the end of the day, you are in the best situation for yourself.
