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Understanding Mortgage Refinancing in Canada

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When you’re already in the middle of a mortgage, and you’re seeing interest rates in the paper or online that are significantly lower than what you’re paying, it’s tempting to think about Mortgage Refinancing in Canada. This is essentially what happens when you do a Refinance; you’re paying off the mortgage you have by taking out a new one. You can also refinance a mortgage in Canada if you want to lengthen the amortization period or go to a lower monthly payment. When you are thinking about refinancing, there are quite a few things to think about, depending on your own particular situation. One of these is a prepayment penalty, which is a major factor if you have a closed mortgage. Would the interest rate differential that the process would cost you be worth the lower rate over the life of the loan? If you’re not sure, take a look at some of the reasons why people commonly go through refinancing and consider whether it could be right for you.

Take a look at your existing debt load.

While credit card debt in Alberta and western Canada is not as high as it was at the start of the recession in 2008 and 2009, the fact remains that there are still quite a few people who find themselves paying high interest rates on multiple credit cards while making a mortgage payment at the same time. One benefit of refinancing is rolling all of that debt into one payment each month. If you have the equity on your house to make the extra room, you can eliminate that debt at the interest rate of a refinance loan instead of paying the high interest rates that go with credit card debt. If your card debt has gone up into four or five figures, it can take years to get rid of those debts and the associated interest, so this can be a wise step that will save you thousands of dollars.

Refinancing A Mortgage in Canada

Analyze the interest rate you are paying now.

If you’re just looking at your own home loan, as opposed to rolling in other debt as well, it may not make a lot of sense to make a change with your mortgage unless you’re looking at knocking more than a couple of percentage points off your interest rate. If you started out with a high ratio mortgage and are paying mortgage insurance in addition to a higher rate of interest, and you now have the means to put down enough money to qualify for a conventional loan, then it might be worth the prepayment penalty. Amansad Financial has specialists who can take you through the calculations for staying with the status quo as opposed to refinancing, so that you can make the best choice for your own personal situation. 

What if you’re sitting about 18 months away from renewal on your mortgage?

You like your rates now, but you think that mortgage rates are going to climb in the near future. Rates have stayed near historic lows for a couple of years now, but the fact that the North American economy is picking up means that interest rates almost have to start moving upwards before you are ready for renewal. You might think about negotiating an early renewal for as long as 10 years while the rates are still at rock bottom levels. This gives you as many as eight extra years worth of payments at today’s low interest rate. If rates even go up by 1 1/2 or 2 percent between now and renewal, you may see your mortgage payment balloon well up past what you can afford to pay.

Mortgage Refinancing to Obtain Cash Flow

When you take out a mortgage on a property, whether it is your primary residence, a vacation home or an investment, you start out with a monthly payment that fits within your budget. However, budgets can often go through significant changes as time goes by. Perhaps you or your spouse goes through a job loss or a major illness that keeps one of you from being able to bring in the same amount of money that you had. Maybe you have a child about to head off for college, or maybe you or your spouse is considering retirement. As a result, you may have run up some significant credit card debt that you are now paying back — but at interest rates that are much higher than what you are paying on your mortgage. Or you may have had to take out a student loan for one of your children or purchase a car sooner than you had planned.

In any of these scenarios, you may find that your monthly cash flow is compromised to some degree. The chance to refinance to boost monthly cash flow can bring you peace of mind and give you the flexibility to change your lifestyle.

How does refinancing for cash flow work?

If you have equity in your home, you can refinance to take that equity out and use the money to pay off higher-interest loans, and then pay off the newly increased balance in your mortgage — but at a much lower interest rate. You can erase tens of thousands of dollars in consumer debt and notes on cars and other purchases and still find yourself paying out significantly less per month.

Here’s an example.

Current situation;

  • Your home is worth $400,000.
  • You bought it for $350,000 years ago.
  • Your current balance is $120,000
  • This means you have $280,000 in equity (the value minus the balance due).
  • You owe $35,000 in credit card debts, all carrying between 20 and 25 percent interest rates and pay $1050 a month
  • You also owe $35,000 in a balance on your car loan, at an 8 percent interest rate and pay $700 a month

Solution 1: (Good Credit)

  • Increase your mortgage to $195,000 (Use $75,000 in equity).
  • Assuming your monthly payment increases by $550 if you wanted to keep amortization the same.
  • Increase cash flow $1,050 in increased cash flow each month.

Solution 2: (Bad Credit)

  • Keep your existing 1st Mortgage (may be the better option depending on your penalty to break the mortgage early)
  • Obtain a $70,000 Second Position Equity 2nd Mortgage (rates are generally 10% or greater plus fees)
  • Assuming your monthly payment is $583.33/month at 10%.
  • Increase cash flow $1166.67 in increased cash flow each month.

If your credit is pristine, then refinancing should be no problem for you with an institutional lender. However, if your recent finances have led to some credit issues, Amansad Financial may be able to refer you to an “Alt-A” or “B” lender who works with people a little further down the credit ladder. If that isn’t an option, we can directly assist you with a private mortgage within our lender investor network.

Amansad Financial has helped many people make the right decision for their existing mortgages. Knowing the best way to approach refinancing has made us an industry leader in Alberta and western Canada. One of our specialists will go over your current mortgage situation as well as your financial state, and after talking to you about your goals and aspirations, he will suggest a course of action with regard to mortgage refinancing in Canada. We have a track record of satisfied customers, and referrals are one of our primary sources of new business. Give us a call today to find out how we can help you!

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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