Refinancing a mortgage is one of the more significant ways you can change your ongoing mortgage, and it can be costly. That said, mortgage refinancing gives you significant flexibility to adjust the features of your mortgage to better suit you. As a result, the cost may well be worth it for you.
Here’s a rundown of the main costs associated with a mortgage refinance.
What is refinancing a mortgage?
Refinancing a mortgage is when you break your current mortgage and start a new one. In doing so, you’ll be able to change the form and features of the mortgage to suit your current needs. You can borrow more from your mortgage (assuming you have home equity to spare), increase your amortization period, as well as add additional features like a home equity line of credit.
While some of these changes can be made by simply renewing your mortgage at the end of your term, most require a complete refinance.
How much can you refinance a mortgage?
Refinancing your mortgage can be an excellent source of funds to consolidate debt, complete a home renovation, or to send your children to post-secondary education. In Canada, you can refinance your mortgage up to a loan-to-value ratio of 90%. Loan-to-value ratio is the total mortgage amount divided by the home value.
For example, let’s say you own a home worth $200,000 and have $150,000 left to pay on it.
Current mortgage: $150,000
Home value: $200,000
If we take the mortgage amount and divide it by the current home value we get a loan-to-value ratio of 75%. If you want to borrow money from your home, you can borrow up to 90% of the home value as stated above.
Using the above example, let’s first figure out how much you could potentially borrow in a refinance.
Maximum mortgage: $200,000 * 90% = $180,000
Then, we’ll take that amount and subtract the amount remaining on your mortgage to figure out how much you can borrow.
How much can you borrow?: $180,000 – $150,000 = $30,000
Though refinancing may be cost-effective, it’s important to consider and understand all of the costs involved. To determine if refinancing is the most financially viable option, you must consider the best mortgage rates and other costs involved and compare this to other financing options such as a line of credit.
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Fees to pay when refinancing your mortgage
There are generally several different fees that you’ll be required to pay when refinancing your mortgage, depending on the circumstances of your mortgage. Below are the main ones you’ll need to consider.
Mortgage breakage penalty
If your refinancing requires you to break your mortgage contract early, you will, unfortunately, have to pay your lender a penalty a prepayment penalty. This will generally be the largest fee you’ll be required to pay, as compensation to your lender for breaking your contract early. Depending on the size, term, and features of your mortgage, this penalty can vary greatly.
The way your penalty is calculated depends on your rate type. If you have a fixed-rate mortgage, your prepayment penalty will be the greater of three months’ interest or the interest rate differential (IRD). If you have a variable rate mortgage, your penalty will be three months’ interest. Use Ratehub.ca’s mortgage penalty calculator to determine what it will cost you to break your mortgage early.
If you choose to refinance your mortgage with your current lender you may be able to avoid a breakage penalty. Some mortgage providers will give you the option to leave your existing mortgage at the current rate you are paying and add the additional mortgage amount at a new rate. It’s very important to ensure the mortgage rate they are offering you is competitive. If it is higher than current mortgage rates, you will want to ensure it is worth saving the mortgage breakage penalty.
Mortgage discharge fee
If you are switching lenders as part of your refinance, you’ll need to pay a fee to discharge your mortgage from your current lender. Discharge fees vary by province and lender, but they are typically between $200 and $350.
Appraisal and inspection fees
Many lenders will require that a new home appraisal be performed on the property being refinanced to determine the loan to value ratio. The average home appraisal is between $300 and $500. This is usually required to be paid up-front.
If you bought your home recently and already have an appraisal on file, sometimes this service can be waived. However, if you suspect your home has gained value, you may want to have your home reappraised.
Mortgage registration fee
Whether you leave or stay with your current lender, you will have to pay a mortgage registration fee. Part of the refinance process involves your lender removing the current mortgage amount from the title on your property and re-registering it with a new mortgage amount. The provincial government regulates your registration fee and is typically around $70.
When you refinance your mortgage, you’ll need to consult with a real estate lawyer. Your lawyer will review your mortgage loan and its terms and conditions, register the new mortgage, and conduct a title search to make sure no liens have been made against your property. It’s the lawyer’s job to facilitate the entire financial transaction between you and the lender. Legal fees for a refinance typically range between $700 and $1,000.
If you’re switching lenders, and your mortgage balance is greater than $200,000, your new lender may pay your legal fees for you.
The Bottom Line
Refinancing your mortgage can be a great strategy for your long-term financial health. But, before making this decision, it’s important to do your research. Be sure you compare rates from multiple lenders and compare refinance offers. Ratehub.ca’s mortgage refinance calculator automatically considers the cost of refinancing your mortgage with mortgage rate deals available today, making it simple to decide if a mortgage refinance is right for you.
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