Is it Time For a Mortgage Refinance?
You’ve likely heard that the federal government is implementing new mortgage lending rules in a couple of weeks. These rules will cut the allowable mortgage refinancing amount from 95% to 90% of a home’s value. And you’ve most certainly heard that interest rates are set to increase by summer, if not earlier. (TD and RBC have already raised their rates.) With all of this news, you might be wondering whether now is the time to refinance. Here are few points to consider when answering that question.
First of all, you need to figure out the pre-payment penalty. Mortgage agreements can vary by degree but most penalties are based on the interest rate differential (IRD). According to CBC News, the IRD is “generally based on the difference between the original mortgage interest rate and the rate the lender could charge now when relending the funds for the remaining term of the mortgage.”
For closed mortgages, the lender will typically charge as a penalty the IRD or three months of interest – whichever is higher. Ultimately, the amount will depend on the interest rate of the original mortgage and the amount of time left in the mortgage term.
Generally, the guideline for refinancing is that the closer you are to the end of the term, the more sense it makes. If there is a lot of time left before the mortgage matures, you could pay a steep penalty for refinancing.
For variable – rate mortgages the penalty tends to be three months’ interest. Refinancing a variable-rate mortgage may be beneficial, but it is best to consult with a mortgage professional to ensure you will come out ahead in the long run.
CBC News discussed another benefit of refinancing – using the equity in your home to help pay down other debts. Using your home equity to consolidate debts may make the refinance more affordable. Yes, you might have to pay a penalty, but the savings in interest from shifting your high – interest debt to a lower – interest mortgage will likely offset that penalty by a considerable margin.
The decision to refinance is a difficult one and it depends entirely on your unique situation. As the CBC report recommends, it is often best to shop around or to consult a certified mortgage broker who has the training and experience to negotiate better deal for you.
