Refinancing your mortgage can be an excellent source of financing 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 by the current home value we get a loan-to-value ratio 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 from your home equity line of credit.
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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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-$500 and 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 breakage penalty
If your refinancing requires you to break your mortgage contract early, you will unfortunately have to pay your lender a penalty called a prepayment penalty – more on the costs of refinancing. The amount you pay will depend on a variety of factors. Including the day you signed your original mortgage contract, the term of that contract and your existing mortgage balance, mortgage type and rate.
Use Ratehub.ca’s mortgage penalty calculator to determine what it will cost you to break your mortgage early.
You can avoid mortgage break fees with blended payments
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 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.
Mortgage default (CMHC) insurance
Mortgage default insurance, which is commonly referred to as CMHC mortgage insurance, used to be mandatory. However, as of 2016, you cannot use the CMHC when refinancing your home. Something to consider if you thought you could rely on it.
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 shop multiple lenders and compare refinance offers. Use Ratehub.ca’s mortgage refinance calculator to see if a mortgage refinance is right for you.
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