TL;DR: refinance your mortgage to lower your payments, eliminate other debt, or free up cash to do other things. We'll help you figure out the costs involved (which will unique and specific to you) and guide you to making an informed decision about whether to stay the course, or refinance into a new mortgage.

4 minute read

There are all kinds of reasons why refinancing your mortgage might be a good idea. You can quickly check out whether it's a possibility using this 60-second calculator. If you have at least 20% home equity, you may be eligible to re-write your mortgage contract. We will guide you through the process of figuring out if all the costs of refinancing are worth it.

The most common reasons to refinance are:

Reduce your interest rate/payments

One of the best, and most common reasons to refinance your mortgage is to take advantage of a lower interest rate. Interest rates are volatile these days - they move up and down quickly sometimes. You may get into a 5 year term and the rate you got may have been a really great one - at the time. A couple of years later, and you may find that rates have decreased quite a bit. Perhaps you're wondering if there's a way you can lower your monthly payments. As long as you qualify and as long as the loan-to-value ratio is 80% or less on the new mortgage, you definitely can. Usually the biggest hurdle is the prepayment penalty. This amount can range from under $2,000, to well over $10,000, and that could make all the difference as to whether you will save money as a result of refinancing.

Long term, overall savings is of course the name of the game - that's how you build wealth over time. But it's not the WHOLE picture. Sometimes it's desirable simply to lower your payment, and the transaction costs to get there may matter less. There is no one-size-fits-all scenario, but we're always here to help you figure out what option might work for you - and that might be to just sit tight with the mortgage you have!

Consolidate other debt

Yes! It IS possible to clear up other debt and include that debt in your new mortgage! If you have lines of credit, high-interest credit card debt, or car loans, and you have available home equity, it's worth looking at consolidating that debt into the mortgage.

The interest rate charged on mortgages is the lowest interest debt available, so it makes sense to clear off other, higher-interest debt and replace it with mortgage debt.  When you consolidate debt and clear off a bunch of balances owing, your credit score will improve, you'll save money on overall interest costs, and your monthly payments will be lower as well.

But, beware the revolving credit trap! If you clear off your credit cards and lines of credit, and then rack them up again, you'll be even further behind. It's very important to have a well thought-out plan ahead of time so that you set yourself up for success after your refinance. 

For example, if you pay off a car loan with a very high monthly payment, your monthly cash-flow gets better - you have some additional money to use on other things. But if your car loan was going to be paid off in 3 years, and you take a new 25 year amortization, you just turned a 3 year loan into a 25 year loan. At that point, it doesn't matter what the interest rate is - you will pay a lot more in interest expenses by the time that car debt is paid off. If you had stuck with the remaining 3 years, your monthly budget might be a bit tighter, but you will save money vs. paying off the same amount over 25 years. On the other hand, if you take some (better yet: all!) of the money you're saving every month and use it to pay down your mortgage faster, you'll get the best of both worlds: you'll be debt free sooner, AND you can enjoy that extra pocket money a little bit in the meantime.

Use your home equity for other things

"Your mortgage is a financial tool." Have you ever heard that one before? This is a perfect example of how true that is.

If you have paid down your mortgage over time to below 80% loan-to-value, and you would like to "withdraw" that money that's sitting there as value locked in your home, refinancing is how you would free up that value to use for other things. Common things people use their home equity for are debt consolidation, investment opportunities (including real estate investing), RRSP contributions for tax planning purposes, tuition/career training, and all kinds of other things. The possibilities really are endless, and there is no requirement as to what you can or can't do with the funds once you receive them - the choice is entirely up to you (although lenders will ask).

This is one situation where saving money on interest may or may not be a consideration. If the primary driver is to free up cash to do some important life thing that you need to do, you may be less worried about saving money and more worried about doing that other thing you need the money for. That being said, sometimes the total cost to refinance is simply not worth it. We'll help you figure out what all the costs are, and then you can make an informed decision about whether you want to go ahead or not.

Eligibility

Thanks to federal Department of Finance rule changes since 2011, the maximum loan-to-value ratio on a refinance is 80%. What this means, is that you have to owe no more than 80% of the value of your home on the mortgage you already have. If you want to refinance a $300,000 home, the mortgage on it must be less than $240,000. This will exclude most first time home buyers until they are 5-7 years into their mortgage. Changes in property values can help, because it's less about the mortgage amount, and more about the loan-to-value ratio.

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