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?
**We work what feels like our WHOLE lives to pay off our homes. ** Right? At least 25 or 30 years! Why in the world would we EVER consider taking the equity out of our home? Although refinancing sounds scary, there are so many advantages and opportunities if you have equity in your home. Here are a couple to consider:
**Refinance for Renovations. ** As your home ages, work needs to be done to maintain your investment. A new roof, a new fence or even a furnace that needs updating. These are all necessary evils that come with homeownership. Many of us choose to add a bedroom for a growing family, finish our basements or redo our kitchens to upgrade the home. Again, these are all normal desires that surface over the years as a homeowner. Putting the cost of the renovations on to a line of credit is going to cost you interest between 7-9%.. A credit card? 13-18%. Every day, I meet with clients that feel like they’re running on a hamster wheel paying off excess credit card debt. If you consider refinancing your home instead of using credit cards, you’d be in the range of about 3.50% and the payments are MUCH smaller!
**Refinance to pay off excess debt. **Sometimes things just get tricky. We need cash quickly and we haven’t had time to research all of our options. This happens more often than you think! If you own a home with equity and you feel like you’ve got some payment piling up, refinancing could be the perfect solution to take some pressure off.
**Refinance for investment. ** Did you know that if you pull equity out of your home and then use that money to invest, either in RRSP’s, Mutual funds, the stock market or even another property, you’re actually able to write off the mortgage interest you’re paying on your principal residence? True story! You can pull equity out (or refinance) your home, invest the money to get it working for you AND end up with a smaller tax bill at the end of the year! Triple win!
**Refinance to purchase a Rental Property. **In a challenging employment and mortgage environment, Calgarians are finding it harder and harder to purchase their own homes. This creates two opportunities: a buyer’s market, and a strong rental market. The combination makes for an excellent time to purchase investment Real Estate.
**Children’s Education? Early Inheritance? ** FUN FUN FUN in retirement? Another reason you might want to refinance your property as a long-term property owner is to help your children to achieve their goals. Education is incredibly expensive and the barriers to entry with homeownership have never been higher. Refinancing your home as a way to provide early inheritance might be perfect for your family! (And the kids can pay the interest payments! At least that is what I’ll be making my kids do)!! And don’t forget enjoying your life in retirement. A refinance or equity release from your home might be the perfect way to add to your monthly income in retirement.
*I know what you’re thinking now, “Okay, okay lady, so what is the process if we actually want to consider this refinance business?” *
**Step 1: ** We’ll have a quick call and figure out what your ultimate goals are.
**Step 2: **We’ll gather the documents. I’m going to need your property tax statement and your most current mortgage statement. I might need employment documents if you’re still working, or your most recent tax returns if you’re not working. It’s that simple!
**Step 3: **We’ll structure a transaction just for you. Do you want a mortgage payment? Do you want an interest only payment? Do you want NO payments? There are so many choices available with these transactions, we’ll be able to figure out exactly what works best for your specific situation!
Download the Why Would I Refinance PDF here.
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.
Can a Bank Deny Your Mortgage Renewal?
When you renew your mortgage with your existing mortgage lender, there is typically no qualification process to spark any refusal to renew your mortgage. That said, missed mortgage payments may trigger an investigation into their willingness to renew. Further uncovering negative changes in your income or credit may indicate that you are at a higher risk of NOT paying your mortgage. It’s possible that these changes can result in your mortgage renewal being denied.
If your mortgage renewal is denied, it’s important to remember that you may have other options as a borrower. Understanding your options and the reasons why your mortgage renewal is being denied is essential to navigating this tricky situation.
Key Takeaways:
Banks can technically deny your mortgage renewal in Canada under certain circumstances.
As a borrower, you may have options even if your bank denies your mortgage renewal.
To prevent a mortgage renewal denial, it is important to consult your mortgage broker the minute you start to experience financial hardship. Your mortgage broker can help you navigate the situation with the least risk to your mortgage renewal.
Reasons a Bank Might Deny a Mortgage Renewal:
Missed Payments
If you've missed multiple mortgage payments, your lender might reject your mortgage renewal request. In fact, if you fail to make your mortgage payments, not only will you be denied a renewal, but you could be at risk of foreclosure.
Poor Credit
Pulling credit is a common procedure at mortgage renewal. If you’ve experienced financial hardship that has resulted in excessive missed payments, consumer proposal or bankruptcy, there is a chance that your lender may be careful at mortgage renewal. That being said, if you’ve managed to pay your mortgage as agreed (despite financial hardship), then there is a strong likelihood your mortgage will be renewed at your current lender.
What Happens if Your Mortgage Renewal Is Denied?
It's important to note that each lender has its own criteria for approving mortgage renewals. Therefore, it's always a good idea to talk to your lender and broker about why your renewal request was denied and what you can do to improve your chances of approval.
As an aside, you should always be talking to your broker 120 days before your renewal to ensure you have many options at the time your mortgage renews. Renewing with your current lender means you’re a “price taker” but taking the deal to market means that you’re keeping your lender honest and seeking the best rates.
If renewing at a triple A lender isn’t an option for you, B lenders might be an option as they are often more flexible than A lenders like the big 5 banks. If B lending is also not an option, your final options may be a private lender or selling your home.
Legal Rights of Borrowers:
As a borrower, you have legal rights when it comes to your mortgage renewal. The lender cannot simply deny your mortgage renewal without providing a valid reason. In Canada, the law protects borrowers from unfair practices by lenders.
When applying for a mortgage renewal, the lender must provide you with all the information you need to make an informed decision. This includes the terms and conditions of the renewal, the interest rate, and any applicable fees or penalties. If the lender fails to provide this information, they may be in violation of the law.
If your mortgage renewal is denied, you have the right to appeal the decision. You can contact the lender and ask for an explanation of why your renewal was denied. If you are not satisfied with their response, you can file a complaint with the Financial Consumer Agency of Canada (FCAC).
The FCAC is a government agency that regulates financial institutions in Canada. They have the ability to investigate complaints of unfair practices by lenders and take action to protect consumers. If the FCAC finds that the lender has violated the law, they can impose penalties and require the lender to make changes to their practices.
In addition to the FCAC, you can also seek legal advice if your mortgage renewal has been denied. A lawyer can help you understand your rights and options, and can represent you in court if necessary.
Steps to Prevent Mortgage Renewal Denial:
When it comes to renewing your mortgage, there are a few things you can do to prevent being denied by your bank. Here are some steps you can take to ensure that your mortgage renewal goes smoothly:
Don’t miss your mortgage payments
Not missing your mortgage payments will keep things simple and likely avoid any further investigation into your overall financial situation.
Communicate with Your Lender
If you are having any financial difficulties, it's important to communicate with your lender as soon as possible. They may be able to work with you to find a solution such as adjusting your payment schedule or offering a temporary payment deferral.
Shop Around for Better Rates
Regardless of what your current mortgage lender is offering you, you should always be shopping with your mortgage broker when you’re within 120 days of your maturity. This will put you in the most secure position possible when your mortgage renews.
Be Prepared for higher payments
With interest rate fluctuations, your mortgage payment can change drastically upon renewal. This is because your payment is heavily based on your interest rate. Your mortgage broker may have some solutions to help shrink that payment upon renewal to ease the effects of rising interest rates.
Get Help From a Mortgage Broker!
Always get a second onion from your mortgage broker. A mortgage broker can help you find a new lender or a new product that may be substantially more helpful than a simple renewal with your current bank.
Mortgage brokers have access to a variety of lenders and products to help you find a more tailored solution.. They can also help you navigate the application process and provide guidance on the documentation you need to provide.
If you’ve been denied of a mortgage renewal or you’re worried you might not be approved when your mortgage renews, contact the mortgage experts at Spre Mortgage. We can help you evaluate your mortgage options and navigate the process.
