When to Refinance Your Mortgage or Renew

No-hassle mortgage renewals are appealing, but maybe it’s time to rethink the pros and cons of renewing vs trying to refinance your mortgage.

Signing for new house

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.

When is it Worth it to Refinance Your Mortgage? 

Is it good to refinance your mortgage? Sure, if you can:

  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.

Consolidate debt when you refinance your mortgage. 

Here’s What Happens When You Refinance Your Mortgage

What it means to refinance your mortgage is this: 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. Discharge existing obligations when you refinance your mortgage. 

Mandatory Mortgage Stress Test Applies

Just what are the rules for refinancing? Mandatory mortgage stress tests apply if you renew or refinance your mortgage. For 2022, mortgage borrowers (yes, including those with 20% or more down) must show they can afford interest rates of 5.25%, or your lender’s offered interest rate plus 2%, whichever is higher. How much you can afford if you refinance your mortgage.

Abiding with rules

Current Rules for CMHC Borrowers 

Lending rules changed in 2020 due to COVID-19, but relaxed somewhat in 2021. Still, getting a mortgage is harder for first-time and marginal home buyers. 

  • Homeowners who rely on CMHC mortgages are no longer be able to borrow money for down payments. New rules for borrowing down payments

  • Maximum gross debt service (amount of debts owed) are currently limited to 39% of gross income, and total debt service (all debts including a mortgage) to 44%. 

  • The minimum credit score for mortgages is 600 for at least one borrower. 

  • CMHC requires 5% down for the first $500,000, and 10% for the balance.

  • Maximum lending amounts are $1 million amortized over up to 25 years. 

What Tighter Mortgage Lending Rules Mean

How does that translate? A $750,000 mortgage with 10% down, amortized over 25 years using a five-year fixed mortgage at 4.99%, costs around $4,044 a month. Lenders include principal, interest and tax (PIT) payments, heat, 50% of condo corporation fees, and debts like credit cards or vehicle loans when calculating your mortgage affordability. Confirm your debt service ratio before you refinance your mortgage. 

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. Checklist for comparing mortgages. 

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.

Real estate questions you ask our lawyers.

Calculating house expenses

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. Use your RRSP, and your spouse’s, for a downpayment.  

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. Verify a mortgage broker is licensed in Ontario. It’s mandatory. 

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. Your lawyer’s role in your mortgage refinance. 

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. 

Refinancing hurts your credit score temporarily, so if you are applying to multiple lenders, do so within 30 days. That score will recover quickly if you keep up your mortgage payments, and don’t default on or fall behind on paying other debts. But making multiple enquiries over an extended period can cause Equifax or TransUnion credit bureaus to lower your score further. 

Using a virtual lawyer from the privacy of your home. 

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 any of our Greater Toronto Area or Ottawa 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.