Refinancing a Mortgage in Canada: Your Step-by-Step Guide
19 June, 2018 / by Glenn Carter
For homeowners, there may come a time when refinancing mortgages of their properties will be something they will have to do.
The Canadian Mortgage and Housing Corporation (CMHC) describes refinancing mortgages as a type of financing that allows the homeowners to pay in full the amount of their prior mortgage by securing another loan. This new loan comes with its own terms and a different interest rate from the original one.
This type of financing lets borrowers receive a loan amounting to as much as 80% of the appraised value of their home. Lenders allow these homeowners to pay for the refinanced mortgage for a long period of time, and their interest rates are generally lower compared to the rates of other types of personal loans.
There are many valid reasons for you to refinance your home, and there are certainly several advantages that come with doing so if accomplished at the right time. However, there are many considerations and several steps that you must take before you can successfully access your home’s equity and to secure another loan with more favorable terms.
To help you, here is a step-by-step guide on how you can refinance a mortgage in Canada. You should also consider consulting an expert on this subject matter to gain a better understanding of the entire process.
Step 1: Decide whether you need to apply for a loan.
Refinancing your mortgage is a serious and long-term commitment. Therefore, before you approach a lender, you must first determine whether you have a good enough reason to apply for a loan. The following examples are considered valid reasons to apply for mortgage refinancing:
- You are planning to renovate your house.
- You are thinking about buying a new property.
- You need to put up enough money for your child’s education fund.
- You are thinking about entering into a new business venture, but do not have the capital to proceed.
- Refinancing your home is a strategy to consolidate all your debts.
- Interest rates have dropped to the point that refinancing your home can actually lower your borrowing costs.
You must be honest with yourself in deciding whether you’re about to incur a good debt or a bad one. Borrowing is not just a temporary solution to escape your financial troubles. It is also an important opportunity to build good credit history, and ultimately, its main purpose is to improve your overall financial situation in the long run.
Therefore, you must never borrow money for the sake of purchasing something that gets depleted or whose value is guaranteed to depreciate over time. If mortgage refinancing is just another option for you to unnecessarily spend beyond your means, then going into debt won’t be a worthy endeavor.
Step 2: Evaluate if refinancing mortgage is your best option.
Mortgage refinancing may offer lower interests rates but entering into this type of agreement is only beneficial or advantageous to the borrower under certain circumstances. Therefore, you must research about the current value of your property as well as the market rates in your region.
If the present situation is close to ideal and the projected state of the market in the foreseeable future is relatively stable, then it’s the right time to apply for a loan.
However, you may not be able to correctly reach this conclusion on your own, so it is best that you speak with a mortgage professional who can give you an honest evaluation of market conditions and whether mortgage refinancing is your best option.
Step 3: Determine whether you can afford the monthly repayments of a refinanced mortgage.
When you refinance the mortgage of your house, the amount you can borrow will depend on the equity of your home. The Financial Consumer Agency of Canada defines home equity as the difference when the remaining balance of your present mortgage is subtracted from the appraised value of your property. As you continue to pay your mortgage, your home equity increases. The same thing also happens when the value of your house rises.
Here’s an example: Supposing that the appraised value of your house is $275,000, and your remaining payable to your current mortgage amounts to $150,000, then your home equity is valued at $125,000.
However, since you can only receive a loan that amounts to a maximum of 80% of the appraised value of your home ($220,000), then your maximum refinancing credit limit is $70,000. If your lender grants you that amount, you’d be owing a total of $220,000 on your refinanced mortgage.
Add the fact that new interest rates may apply on the refinanced part of your mortgage, and you may need to secure a separate mortgage loan insurance from your original one and pay for various administrative fees, you need to do the math to determine if paying for a new loan has room in your budget.
Therefore, before you apply for a loan, you must ask yourself the following questions:
- “How much do I need to borrow?”
- “How much can I actually afford to borrow?”
- “Do I urgently need the money or is it possible to just save up for it?”
- “How much can I afford to spare for monthly loan payments?”
- “Can I still pay off the loan even if interest rates increase?”
If you are honest and realistic with your responses to these questions, then you have a better chance of getting a loan that’s most favorable to you.
Step 4: Understand your credit score.
Your credit ratings can make or break your loan application. Lenders need to determine how good you are with handling money and if you can religiously pay for your mortgage every month.
If you have a low credit score, you will be perceived as a risk, and chances are extremely low that they will entertain your application. Banks in particular may turn away loan applicants who are in debt, out of a job, or have filed for bankruptcy in recent years. Other lenders may be more lenient to the self-employed or those who do not have a steady source of income.
If your credit is badly bruised, the best path to take is to try and repair it first before you apply for mortgage refinancing. This is why speaking with a mortgage professional is critical.
Step 5: Shop around and explore your refinancing mortgage options.
If you already did the math and you find that your credit score is more than adequate, then it’s time to explore your refinancing mortgage options to find the one that suits you best.
According to the Financial Consumer Agency of Canada, lenders who agree to refinance mortgages may offer borrowers the following options:
- A second mortgage. A second loan you can secure with your home equity. You must pay off the new mortgage as well as the original one, and if you default on your payments, your home may be sold off to cover your debt on both loans.
- A home equity line of credit (HELOC). Operates like your typical line of credit but is secured by your property. You can withdraw funds up to the established credit limit, and after you’ve paid the amount back, you can borrow from this line of credit again.
- Other types of loan or line of credit that can be secured with your home. If you’ve made prepayments on your mortgage, then it’s possible for you to re-borrow a portion of that from your lender. Another option you can explore is getting a reverse mortgage, which may apply to homeowners who are at least 55 years of age.
Various lenders also offer different mortgage terms and interest rates, and you need to take the time to understand each one. Below are three basic mortgage loan types:
- Fixed-rate mortgage. You will pay the same monthly payments and interest rate for the duration of mortgage term.
- Variable rate mortgage. Your monthly payments and the interest rate of your mortgage will fluctuate depending on market conditions.
- Hybrid or combined rate mortgage. Terms may include both fixed and adjustable rates.
You may consult with your current lender to find out which options are available to you, or you may approach a mortgage professional to help expand your choices.
Step 6: Calculate the total cost of mortgage refinancing.
When you refinance the mortgage of your property, you’re not just going to pay back the amount you borrowed. You have to consider other expenses such as:
- Home appraisal costs
- Title search fees
- Title insurance fees
- Legal costs
Once you have calculated the total costs that come with refinancing your home, you’ll get a clearer picture if the loan options available to you are favorable or not.
Step 7: Submit your loan application.
Now that you have covered all your bases, it’s time to begin applying for a mortgage refinance on your home. If you plan on doing this all on your own, you’re going to need to approach lenders yourself and ask them for a list of documents that must be submitted along with your application. These lenders require that you present your proof of income and tax documents.
At this point, you may tap the expertise of a mortgage professional to assist you in gathering all the relevant documentation you need. He may also represent you to lenders by submitting your loan application for evaluation on your behalf.
Step 8: Get approved and review the proposed mortgage agreement.
At this point, a lender has evaluated your application and found you qualified enough to secure a refinancing mortgage loan. However, just because they accepted your application does not mean that you must automatically agree to their conditions.
You must thoroughly read and review the terms and conditions of the loan agreement, paying particular attention to the provisions about interest rates and other costs. Ask the lender for clarification if there’s anything indicated on the contract which you don’t fully comprehend. Perhaps with the help of a mortgage expert, you can negotiate a lower interest rate and better terms as well.
If you can reduce your interest rate by at least a half percent, you may be able to make more than enough room in your budget for additional fees and upfront costs. You may even try to lock in a specific rate so that you won’t be burdened by fluctuating costs every month.
Be careful of loan agreements that don’t charge upfront fees. Just because you’re not paying for the closing costs now doesn’t mean they won’t be able to collect it from you in some other form in the future. Your lender may just want you to charge higher interest rates or increase the loan amount you are going to borrow.
Refinancing a mortgage in Canada
If you’ve done the research, crunched the numbers, consulted with a mortgage professional, and found that the loan agreement presented to you is in order, then you can sign it knowing full well that you’ve made a well-informed decision.
And so, congratulations! That means you’ve successful refinanced the mortgage of your home for a good and justified reason, at a reasonable rate, and under favorable terms. All you need to do now is commit to properly utilizing the funds you received from refinancing your home and to slowly but surely settle the loan with your monthly payments.
If you need expert help on refinancing the mortgage of your property, consult with a CMI professional today.