Canadians struggling with debt and climbing mortgage costs amid higher interest rates might want to consider refinancing their loan amid the possibility of additional hikes from the Bank of Canada, one expert suggests.
While refinancing a mortgage can be a source of simplicity and quick relief, accessing the strategy might not be right for everyone depending on their home’s value and the costs that come alongside it, according to Rates.ca mortgage and real estate expert Victor Tran.
Refinancing is essentially a “redo” on a mortgage, Tran tells Global News, which can change a homeowner’s interest rate and amortization while allowing someone to access the equity built up in their property for some quick cash.
Pulling out funds that you’ve built up in your home’s equity can help to finance renovations, make investments or even help a family member put a down payment on their own home, but Tran says the primary use of refinancing in today’s market is likely to consolidate debt.
What is refinancing?
Refinancing allows an individual to bring together disparate forms of debt — not just a mortgage, but a car loan, line of credit or outstanding credit card balance — and distill it into one lump sum with a single rate and payment.
The process also could see somebody reduce the overall size of their monthly payments by extending the amortization — the length of time over which the loan is paid back.
“Refinancing everything into one single payment can simplify someone’s life quite a bit,” Tran says.
Streamlining and consolidating debt with a single rate of interest can be particularly helpful amid the rising cost of borrowing in Canada, he adds.
The Bank of Canada ended its pause on interest rate hikes last week with a quarter-percentage point increase, bringing the policy rate to 4.75 per cent. This has an immediate impact on debt with floating rates like variable mortgages and most credit cards and home equity lines of credit (HELOCs), as well as on any homeowner renewing their fixed-rate mortgage.
The Bank of Canada might not be done yet either, with some observers such as CIBC anticipating another rate hike sometime this summer.
Tran says that with the current rate uncertainty, now is “absolutely” the time to be considering refinancing if the rate hikes to date have ratcheted up pressure on your household and another increase would threaten to overwhelm your finances.
Who is refinancing right for?
Ahead of June’s rate hike, Rates.ca data shows Canadians were already thinking about refinancing.
Quotes for refinancing on the comparator site rose 17 per cent year-over-year last month, according to Rates.ca data.
Tran warns that not all households — or indeed, the houses themselves — are right for refinancing.
Since refinancing involves pulling out some of the equity built up in your home, a property that might’ve lost value in the housing correction tied to rising interest rates over the past year might not have much extra equity to utilize.
The Canada Mortgage and Housing Corp. (CMHC) said in a report released in late May that refinancing activity dropped 32.2 per cent year-over-year in the second half of 2022; the Crown corporation cited the drop in home values as helping to fuel the decline.
Depending on when and where they purchased their home — and whether that market saw a boost or drag on home prices — Tran says refinancing might not be the “right solution” for all owners.
“It really depends on how much equity they built up in the home,” he says.
Penalties and fees associated with refinancing
For those interested in refinancing, Tran says the first step is to speak with your existing mortgage agent or current lender directly to explore what options are open to you in refinancing.
The process of refinancing can come with penalties for breaking your existing mortgage, he notes, but some lenders will offer incentives that waive these fees if you refinance with them.
For those refinancing from a lower rate taken out a few years ago, Tran says a lender will often offer a “blended” product that combines the original interest rate with today’s rates. While that will likely mean ending up with a higher rate on your mortgage than you had previously, it can be a vast improvement from certain kinds of high-interest debt such as credit cards if someone is consolidating, he says.
Whether you break your existing mortgage and start fresh with a new lender or remain with your original institution, you’ll still be requalifying for a new loan based on your current financial situation. For some people, like those who faced a job loss in the past year, that might mean being unable to qualify with an A lender and having to turn to the alternative mortgage market, Tran says.
Refinancing also comes with fees to be aware of that resemble closing costs on a property purchase.
The homeowner will need to pay an appraisal fee for their property again, though this cost can sometimes be covered by the lender or broker depending on their policies, Tran notes. Otherwise, expect to pay around $300 for this, he says.
Lawyers will also be required to put a new mortgage on the property title, adding another few hundred dollars to the process, Tran says.
Stressed homeowners should take upfront fees and the reduction or increase in payments over the lifetime of the loans into consideration before proceeding with a refinancing, he says.
“If you’re in dire need to reduce your monthly payments and to continue to have a roof over your head … that might be the best option for you.”