Guide to Refinancing a Mortgage in Alberta
Refinancing a mortgage can give homeowners the opportunity to access the equity available in their current property or secure better terms for their mortgage. It may be good option to explore with your Mortgage Professional, but its important to understand How, When, and Why to refinance, along with the Costs associated with refinancing and Alternative Options to determine if it’s the best option for your situation.
How to refinance your mortgage
Refinancing is a very similar process to obtaining a new home loan, and the procedure closely resembles applying for a mortgage. The first thing you should do is reach out to a mortgage broker and have a conversation about your homes' value and the funds that you could potentially access (Reminder, you can only refinance 80% of your homes current value). Once you've confirmed that refinancing makes sense and that you will be able to access the equity you require, then you dive into the mortgage application.
You’ll likely need home appraisal to determine your property's current value. Similar to your initial mortgage application, your income, debt service ratios, and credit history will undergo evaluation. Expect to provide documents, including:
Personal identification.
Verification of employment and income.
Details concerning your assets, savings, and debts.
Tax-related documentation.
Additionally, you'll need to undergo another mortgage stress test to assess your ability to repay the refinanced mortgage, particularly if interest rates were to rise.
When deciding whether refinancing is your best option, it's crucial to shop across lenders to secure the most favourable rate, terms, service, and conditions. That’s where your mortgage broker comes in. Remember, you're not obligated to refinance with your current lender, so exploring multiple options is advisable before making a decision. Even if you decide to stay with your current lender for the refinance, don't hesitate to negotiate for a more favourable mortgage contract.
How much can you borrow?
Typically, when refinancing, you can borrow up to 80% of your home's appraised value. However, a portion of this borrowed amount must be used to settle any remaining balance on your current mortgage. The remainder can then be allocated according to your preferences.
For instance, if your home is valued at $600,000, you could potentially borrow up to $480,000 ($600,000 x 0.8) during the refinancing process. Yet, if your existing mortgage balance stands at $400,000, you would effectively only have access to $80,000 after clearing your mortgage ($480,000 - $400,000).
Why to refinance your mortgage
1. Obtain new borrowing terms
Refinancing may offer the opportunity to obtain a lower mortgage interest rate, extend the amortization period, or renegotiate terms that enable accelerated repayment of your mortgage. Each of these adjustments can result in reduced short- and long-term mortgage expenses.
When refinancing to secure more favorable loan terms, it's important to note that you aren't obligated to withdraw any equity from your property.
2. Access equity
Refinancing also offers homeowners the flexibility to access any available equity remaining after clearing their previous mortgage. This surplus could amount to tens or even hundreds of thousands of dollars, contingent upon your home's value and the extent of your equity.
Given that this cash incurs interest charges, it's prudent to allocate it towards expenses that either provide value or appreciate over time, such as:
Home renovations
Investment properties
Debt consolidation
Funding a child's education
Launching a small business
At the end of the day, this is your equity, and you have the autonomy to utilize it however you wish. But before proceeding with a mortgage refinance, ensure you've thoroughly explored alternative, potentially more cost-effective methods of financing.
When to refinance your mortgage
If you decide to refinance your mortgage, its important to have a conversation with your mortgage professional and weigh the new terms you are receiving against the potential charges by your lender to terminate your mortgage contract before the end of the term. If you are consolidating high interest debt, or need the cash to complete a home renovation, it could be worth it to you, however, waiting until close to the end of your term will likely result in lower fees.
You can also choose to refinance your mortgage at renewal time. This would mean that there would be no prepayment penalty, however you may expect some additional costs depending on your situation.
Costs associated with refinancing
Mortgage Discharge Fee: If you choose to change lenders, your current lender may impose a fee ranging from $100 to $400 for terminating your existing mortgage agreement. The exact amount should be outlined in your mortgage contract.
Appraisal Fee: You will likely need a property appraisal, which typically costs between $350 and $500.
Assignment Fee: If you choose to change lenders, your current lender may charge a fee ranging from $5 to $395 for transferring your mortgage to the new lender.
Legal Fee: Your lawyer will need to handle the legal documentation during the refinancing process. Legal fees can vary depending on the type of mortgage you hold.
Title search and title insurance fees: There may be fees associated with title changes.
What Happens to Mortgage Loan Insurance Premiums If You Switch Lenders?
If you switch lenders during the refinancing process, you may have to pay a new mortgage loan insurance premiums, if:
the amount of your loan increases
you extend the amortization period
Make sure to let your new lender know If you have mortgage loan insurance on your current mortgage. This can help prevent you from having to pay mortgage loan insurance premiums twice.
Alternatives to refinancing
Home equity line of credit
If you own a minimum of 20% equity in your home, you have the option to leverage it through a Home Equity Line of Credit (HELOC). The maximum credit limit available will be up to 65% of your home's current market value.
You can acquire a HELOC alongside your current mortgage, eliminating the need to terminate your existing mortgage or incur prepayment penalties. However, it's important to note that HELOC interest rates generally tend to be higher than those associated with mortgage refinancing.
Home equity loan
Another avenue for converting equity into cash is through a home equity loan. This type of loan is typically provided in addition to your primary mortgage, often by a non-chartered bank or private lender. While you can avoid prepayment penalties, you'll be subject to any fees imposed by your new lender. It's worth noting that interest rates on home equity loans can often exceed those associated with mortgage refinancing or HELOCs.
Blend and extend
Certain lenders offer a blend-and-extend option, enabling you to renegotiate your interest rate prior to the conclusion of your mortgage term. With this option, you can prolong your current mortgage term at a reduced rate by combining a new, lower interest rate with the existing one, all while steering clear of prepayment penalties.
Refinancing comes with different Pros and Cons depending on your circumstances. It’s important to discuss your options with a Mortgage Professional to ensure you are making the best financial decision.
