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Refinancing your mortgage can be a great option for Canadians that are looking to shop around for lower rates, consolidate debt, invest or access home equity. Before you commit to refinancing, it’s important to understand how the process works and what you can expect to encounter so you aren’t caught off-guard by hidden fees.
How Refinancing Works
A mortgage refinance is the process of getting a new mortgage for your home, whether it’s from your current lender or a new one. You effectively pay off the first loan in full by using the second (new) one which allows you to lock in with a better interest rate and a new loan term. Keep in mind that this process will bring with it fees and penalties (typically around 3 months’ worth of interest) so make sure the lower rate outweighs these upfront fees in the long run.
In order to pursue refinancing, both you and your home will need to meet some specific requirements:
How Long You’ve Owned The Home
The type of mortgage you have and the amount of equity you have in your home will determine what your prepayment penalty will be. If you have a closed mortgage, the amount of fees you’ll incur will depend on how much time is left in your mortgage term. Translation: the more recent your home purchase, the more it’ll cost you.
Credit Score Requirements
In most cases you’ll need a credit score of at least 620, but the exact score you’ll need in your specific circumstance will depend on a few things, including the type of loan, how many units the property has and how much equity you’re looking to access.
You’ll need to have a certain amount of equity in your home to qualify for refinancing as well. When you apply to refinance, your lender will require an appraisal of the property to determine its value. You can subtract your current loan balance from the appraised property value to determine how much equity you have in your home. While the minimum requirement varies by lender, you’ll typically need 15% – 20% equity.
Your debt-to-income ratio will also be considered when it comes to your application for refinancing. This is calculated by combining all of your reoccurring monthly debt and dividing it by your gross monthly income. While the maximum debt-to-income ratio will vary by lender, you’ll typically need a number that’s 50% or lower.
You’ll encounter multiple fees as part of the refinancing process. Some will apply only when you leave your current lender and others will apply whether you leave or stay:
Mortgage Registration Fee
Whether you’re leaving your current lender or staying, you’ll have to pay a mortgage registration fee that involves your lender removing the current mortgage amount from the title on your property and re-registering it with the new amount. This fee is determined by the province you live in, but is likely going to set you back around $70.
Consulting with a real estate lawyer is an important part of the refinancing process. The lawyer will review your terms/conditions, register the new mortgage, conduct a title search and check to ensure no liens have been made against your property. It’ll likely cost you about $700 – $1,000 for a lawyer to facilitate this entire transaction for you.
Mortgage Discharge Fees
If you’re switching lenders, you’ll need to pay a fee to discharge your mortgage from your current lender. While each lender is responsible for settings their own fees, this will likely cost $200 – $350 depending on which province you live in.
Mortgage Prepayment Penalty
If refinancing means you’ll have to break your mortgage term early, you can expect to pay a fee as a penalty. If you have a fixed-rate mortgage this fee will be the equivalent of 3 months’ worth of interest OR the interest rate differential (IRD). If you have a variable-rate mortgage, it will just be the equivalent of 3 months’ worth of interest. If you’ve chosen to refinance when your mortgage term is up for renewal, then you won’t need to worry about these prepayment fees.
Your financial history and overall financial health play a large part in refinancing, so you’ll be required to provide a few different documents in order for your refinance application to be considered:
Proof Of Income
You’ll need to provide documents that show proof of your income such as current pay stubs and T4 slips. The lender will want to see how much money you have coming in on a regular basis and what portion of your pay goes toward your mortgage costs. They generally require your mortgage payments to be less than 32% of your gross income and your overall debts to be no more than 40% of your gross income.
As with your original mortgage, your lender will require you to have homeowners insurance in order to mitigate their investment risk.
Be prepared to provide documentation on the assets that you have. Checking and savings accounts and retirement accounts are prime examples.
If you’re considering a refinance, do your homework and understand everything you need to know about refinancing and how it can work best for you. Make it a point to check on your credit score, create a realistic budget and understand all the costs associated with choosing this route. Always consult a mortgage professional before you make any big decisions regarding your mortgage. Whether you’re interested in renewing or refinancing your mortgage, there are a lot of factors (and costs) to consider before you make your decision and a professional can help ensure you approach it wisely. Get in touch with our team to learn more about your options!