When to Refinance Your Mortgage or Renew

A no-hassle mortgage renewal can be appealing. Time to rethink the pros and cons of mortgage renewal vs mortgage refinancing.

Four Reasons to Renew Your Mortgage

  1. Your mortgage lender knows you.
  2. Interest rates are already low.
  3. It’s quick and easy.
  4. It costs money to switch lenders.

Pick the Right Time to Refinance a Mortgage

  1. Lock in a fixed interest rate if variable rates spike.
  2. Save thousands with a lower interest rate.
  3. Get better prepayment options.
  4. Consolidate credit card debt.
  5. Pay for big ticket purchases like a new car.
  6. Get a tax refund for a RRSP.

How Mortgage Refinancing Works

When you refinance a mortgage, your new lender pays out your mortgage and gives you a new one. You apply for a new mortgage by providing the lender with a copy of your mortgage renewal letter, proof of ownership (like a property assessment) and property insurance. The lender also needs pay stubs or a letter from your employer to verify your income.

Mandatory Mortgage Stress Test Applies

Refinancing requires you to pass the mandatory mortgage stress test again. For low-ratio mortgages with 20% or less down, lenders add 2% to interest rates (or if it is higher, 2% to the weekly average five-year rate on all insured mortgages). That shows the bank that you can afford the mortgage if interest rates go up. For mortgages with 20% or more down, the current formula is the offered interest rate plus 2% or the Bank of Canada five-year rate plus 2%, whichever is higher.

New Rules for Home Borrowers July 1 

Lending rules in Ontario change again July 1. Homeowners will no longer be able to borrow money for down payments if it increases their debt. Maximum gross debt service (amount of debts owed) will be limited to 35% of gross income and total debt service (all debts including a mortgage) to 42%. The minimum credit score to get a mortgage is now 680 for at least one borrower. Since over 18% of homeowners with 5% down have a gross debt service ratio exceeding 35%, getting a mortgage just got harder for first-time and marginal home buyers. 

What Tighter Mortgage Lending Rules Mean

How does that translate? Since PIT (mortgage principal, interest and property taxes) plus heat count towards your gross debt service ratio, you’ll need a combined income of no less than $160,000 and debts of under $1,000 a month to afford a $750,000 mortgage with 10% down. 

Isn’t There Another Way?

You could go around the mandatory stress test by using a credit union or private lender, but expect to pay more. Federally regulated banks are required to apply the stress test, but other lenders are not. Many credit unions use the test as a guideline, so you’ll need to ask around or have a mortgage broker assist you.

Negotiate Mortgage Refinancing Charges

Mortgage lenders (of course!) charge fees to switch your mortgage at renewal time. You may be able to negotiate a reduced fee or ask a new lender to pay the fees for you, but generally you are looking at: 

  • an appraisal fee 
  • assignment fee to transfer the mortgage
  • discharge fee, including registering a new mortgage
  • and legal fees.

Average Savings from Mortgage Refinancing

Average savings vary, but Ratehub.ca calculates switching from a 2.59% interest rate to 2.39% would save you $2,956 for a five-year, fixed-rate mortgage. Switching to biweekly payments can shave years off your loan, as can rounding up your payments by a few dollars a month, all options your lender can discuss.  

Average Time to Refinance a Mortgage

Give yourself 60 days or more to make the switch. You wouldn’t want your mortgage to roll over before you’re ready.

Best Months to Refinance

Is there ever a good time to refinance? Absolutely. According to mortgage lenders, late October to early December are the best months to pursue refinancing. Lenders are paid by the number of mortgages they refinance or write. Their annual bonus could depend on your business. The last two weeks of the month or end of quarter can be another great time to get a better interest rate. 

When Not to Refinance a Mortgage

You may be better off to blend and extend your existing mortgage to take advantage of lower interest rates. That gives you the benefits of a lower rate that is the average of your current rate and the lower rate, without refinancing and prepayment penalties. Refinancing may also not save you money if you plan to sell your home or give you more stress than it’s worth if you have other debts or expenses. 

Ontario Lawyers for Mortgage Refinancing

Axess Law real estate lawyers can prepare the paperwork and title insurance and sign your new mortgage agreement. Arrange an online video conference and e-signing appointments anywhere in Ontario, 7 days a week, at your convenience. In person meetings can be arranged at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices. Call toll free to 1-877-552-9377 or 647-479-0118 in Toronto or use our online booking form to make day or evening appointments. 
Click here to learn more about Axess Law’s real estate law services.

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