The Benefits of Refinancing Your Mortgage in Ontario

(Seven-minute read time)

In the ever-changing landscape of Ontario's real estate market, refinancing your mortgage can be a strategic move with a multitude of benefits. Whether you're looking to lower your monthly payments, capitalize on lower interest rates, or tap into your home's equity for significant life projects, refinancing offers tailored solutions to meet your evolving financial needs. This article dives into what refinancing is, the various advantages of refinancing, and the costs associated with refinancing.

In this article, we'll also present a scenario that illustrates the impact of refinancing and how such a decision can positively transform your financial scenario. If you're considering a mortgage refinance, understanding these benefits can be the key to unlocking greater financial flexibility and security in Ontario's dynamic housing market.

How Refinancing Your Mortgage Can Strengthen Your Family's Financial Future

There are many ways to refinance, let’s consider the different adjustments you can make and their associated benefits:

1. New Amortization Could Lower Monthly Payments:

   Amortization is the length of time over which the entire mortgage is scheduled to be paid off. Refinancing to a new amortization period usually means extending this time. By extending the amortization period, your monthly mortgage payments become lower, which can ease your immediate financial burden and provide you with more cash in hand. This can be helpful if you’re finding it hard to manage your monthly expenses or if you want to use some of your monthly income for other things like investing or paying for other needs.

   To be eligible for an extension of your amortization beyond 25 years, you’ll need at least 20% equity.

2. New Term Can Help You Take Advantage of Better Rates:

   The term of a mortgage is the length of time your mortgage contract is in effect, including your interest rate and other conditions. By refinancing, you can negotiate a new mortgage term, usually to take advantage of better interest rates. If market rates have dropped since you first obtained your mortgage, you can refinance and switch to a mortgage with a more favorable interest rate. This could lead to substantial savings over the term of your loan since a reduced interest rate means you'll pay less over the life of your mortgage – potentially saving you thousands of dollars.

3. Equity Take-Out (ETO) Can Help You Fund Major Expenses:

   Equity take-out refinancing allows you to access the equity you’ve built up on your property. This involves borrowing more than what you currently owe on your existing mortgage. The funds from ETO can be used for various purposes like home renovations, debt consolidation, tuition fees, or making investments. This type of refinancing can be a cost-effective way to borrow money for major expenses, as mortgage rates are typically lower than other types of loans.

   To be eligible for an ETO, you’ll need to maintain at least 20% equity of your home after the ETO.

You can combine all these elements when refinancing: new amortization, new term, and ETO.

Refinancing to Achieve Goals: A Case Study for Middle-Income Ontarians

The Owen household is seeking to refinance their mortgage. They are currently in the third year of their five-year term with a current mortgage balance of $300,000 and have over 20% equity in their home. Their goal is to lower their monthly mortgage payment while also accessing $40,000 for home renovations.

They spoke to their mortgage broker who helped them with their original mortgage. During the consultation, the Owen household was informed that their decision to refinance would be a great time to do so since there are lower interest rates available now compared to when they first started their mortgage. Also, since their equity is over 20% they are eligible for the ETO needed to fund their renovation and can extend their amortization period. To lower their monthly payment, they’ll need to extend their amortization period from 20 years to 30 years.

Here’s a breakdown of their old mortgage before refinancing and their new mortgage after refinancing:

The Owen household's decision to refinance their mortgage led to several outcomes. Firstly, they took advantage of their refinancing to access $40,000 in cash, which they will use for home renovations to increase the value of their home. Secondly, they reduced their monthly mortgage payments from $1,970 to $1,570, resulting in savings of $400 each month. Thirdly, securing the lower interest rate will result in considerable interest savings over the life of the loan despite the increase in the total mortgage amount. Finally, they obtained a penalty fee of $3,750, which can be rolled into the new mortgage balance to avoid paying upfront.

Overall, the Owen household’s refinancing strategy gives them the potential for home value appreciation in the long term by allowing them to invest in home improvements, reduce their monthly mortgage payments, and secure a lower rate.

As shown in this example, refinancing can provide tangible benefits, such as accessing home equity for important projects, while also adjusting the terms of the mortgage to better fit the homeowners' current financial situation and goals. Refinancing your mortgage can be a strategic move that can significantly enhance your family's financial well-being and open up new opportunities for growth and stability.

Immediate Costs of Refinancing

Refinancing isn't free, and the initial costs can be substantial. Here are some of the fees you might encounter:

1. Legal Fees: Refinancing typically involves legal work, including reviewing and preparing mortgage documents. Legal fees can vary, so it's wise to shop around or negotiate with your lender. This fee could range from $1500 to $2500

2. Appraisal Fees: Lenders often require an appraisal of your property to determine its current market value. This fee is generally unavoidable and can add up, depending on the complexity of the appraisal. This fee could range from $400 to $500.

3. Discharge Fees: If you’re switching lenders, you might have to pay a fee to discharge your mortgage from your current lender. This fee could range from $350 to $400.

4. Penalty Fees: When you decide to refinance your mortgage before your current mortgage term is finished, you often have to pay a penalty fee. This fee is a charge for ending your mortgage agreement early, and the fee will be greater if you decide to refinance early in your existing mortgage term. However, the amount of this penalty can vary, to get the most accurate idea of how much your penalty fee will cost, you can check your lender’s website for a penalty fee calculator.

   The penalty fee is determined in two ways, and the calculation with the higher amount is charged as the penalty fee.

   • Three Months’ Interest: This is a simpler way to calculate the penalty. It’s just the amount of interest you would have paid on your current mortgage for three months. For example, if your monthly interest payment is $500, then your penalty would be $500 times 3, which equals $1,500. This calculation is most applied to variable-rate mortgages.

     • To calculate without a monthly interest payment, you can use your outstanding mortgage balance, times your current mortgage rate, times three months’ interest. For instance, $300,000 times 0.05 times 0.25, which equals $3,750 (0.05 is the decimal amount of 5%, and 0.25 is 3/12 of the year, aka the three payments out of the total twelve payments out of the year).

   • Interest Rate Differential (IRD): This method is a bit more complex, and every lender calculates this differently. But overall, the IRD is the difference between the interest rate of your current mortgage and the rate for a new mortgage with a similar term, multiplied by the amount you still owe and the time left on your term. To provide a simplified example, if you have $200,000 left on your mortgage and there are 2 years left, and the difference in interest rates is 1%, your IRD penalty would be about $4,000 (1% of $200,000 for 2 years). This calculation is most applied to fixed-rate mortgages. It’s always best to know your IRD penalty before you commit to a refinance so you have a better understanding of the cost associated before you proceed in the refinancing process.

In many situations, you can roll these fees into your new mortgage to avoid paying them out of pocket.

The Impact of Refinancing on Long-Term Financial Goals

Refinancing your mortgage can be an appealing option for many homeowners in Ontario, however, it's crucial to be aware of the long-term impacts of refinancing your mortgage.

1. More Interest Paid Over Time: By extending the life of your mortgage, you might end up paying more interest over the long term. This is particularly true if you don't get a significantly lower interest rate.

2. Extended Mortgage Duration: Refinancing might mean that you'll be paying off your mortgage for a longer period. While this can lower your monthly payments, it also means you'll be in debt for an extended period.

3. Equity Dilution: If you're refinancing to tap into your home's equity, remember that this reduces the equity you've built up. It's important to use this money wisely – for instance, for home improvements or paying off high-interest debt, rather than for fleeting expenses.

Understanding both the immediate and long-term costs of refinancing is vital, as they can add up quickly and impact the overall financial benefit of refinancing.

Is Mortgage Refinancing Worth It?

Refinancing your mortgage in Ontario can offer numerous benefits depending on your situation. Overall, it's crucial to weigh the benefits against the immediate costs and long-term financial implications. Mortgages are not permanent, therefore you can adjust your mortgage in the future and even go back to the previous terms before refinancing if your future financial situation changes.

Every homeowner's situation is unique, so it's advisable to consult with a financial advisor or mortgage broker to understand how refinancing will affect your specific financial situation. By being fully informed, you can make a decision that aligns with your long-term financial goals.

At WealthTrack, we can help you reach your financial goals — book a free 15-minute call with us today to find out how to get started.

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