At the end of the day, we all want to enjoy our lives, right?! Well, why not take advantage of today’s low interest rates and the money you’ve stashed away by diligently making your mortgage payments to live a little? Let’s get rid of that debt and boost your cashflow so you can save for what you really want, like that investment property you’ve been dreaming about.
Canadians refinance their mortgages for a variety of reasons, and often within the first three years of a five-year mortgage term. Yup, that’s correct. We most often get ourselves locked into a five-year term that we end up breaking early. The logic often defies us too! So, if you think it’s impossible or impractical to break your current mortgage and take advantage of your home equity and/or great rates, it’s important to explore your options before ruling out a refinance.
Breaking your current mortgage often makes the most sense in a low rate environment such as we’re experiencing today. And, in certain circumstances, such as renewing before the end of your current term in order to secure a lower rate now, rather than sitting back and seeing where rates land by the time your term is up, you may even be able to secure a renewal without breaking your mortgage. Now, that’s a major bonus!
Renewing your mortgage early
And here’s some more great news! A mortgage renewal is 100% free with nesto in most cases. The primary exception to this rule is when the existing mortgage being renewed is registered as a collateral charge. Collateral charges tend to make breaking your mortgage a little messier, but we can still even simplify this by setting your expectations. If you have a collateral charge mortgage, you’ll pay approximately $800 in legal fees to make the switch. This fee can be paid upfront, added to the new mortgage, or paid by the new lender in exchange for a slightly higher rate.
If your mortgage includes a home equity line of credit (HELOC), it’s definitely registered as a collateral charge. It’s also important to be aware that some banks register 100% of their mortgages this way even without a HELOC component. And, chances are, you don’t even know. That’s not the nicest move banks can make, but it doesn’t stop them. So, if you’re unsure whether you have a collateral charge, we’ll be happy to examine your current mortgage and find out.
Refinancing to reduce monthly payments
If you’re finding your dollars are really being stretched to the limit each month or you’d like to put more money towards something other than your mortgage, you’re not alone. Yes, we understand that there are important purchases you’d like to finance outside of making your mortgage payments! In fact, some of our customers are refinancing to extend their amortization back up to 25 years – or even 30 years – in order to improve their monthly cashflow and feel like they can still build fun memories.
You can refinance today into a full-featured mortgage with nesto at a 5-year fixed rate of 2.39%!*
Many customers are also entrusting us to help consolidate their outstanding unsecured higher-interest debt – such as credit cards and lines of credit – within their mortgage. Paying off that car loan and those two visas while also securing a new, lower mortgage rate at the same time can make a world of difference to your cashflow.
Other popular reasons for refinancing to take advantage of home equity include: financing home renovations; purchasing an investment property or making other investments; sending kids to school; or even taking a much-needed vacation.
What’s the cost of refinancing?
We’re going to be really upfront here by saying that, in some cases, the penalty can be quite substantial if you aren’t very far into your current mortgage term. And sometimes it just doesn’t make sense for you to take a big hit no matter where you’d like to spend your equity. But, we can quickly determine if breaking your mortgage now will benefit you in the future.
People often assume the penalty for breaking a mortgage amounts to three months’ interest payments so, when they crunch the numbers, it doesn’t seem so bad. In most cases, however, the penalty is the greater of three months’ interest or the interest rate differential (IRD). That darn IRD is what you hear about in the news when people are forced to pay thousands to break their mortgage!
The IRD is the difference between the interest rate on your mortgage contract and today’s rate, which is the rate at which the lender can relend the money. And with rates so low these days, the IRD tends to be greater than three months’ interest. Because this is a way for banks to recuperate any losses, for some people, breaking and renegotiating at a lower rate without careful planning can mean they come out no further ahead.
There’s not one universal way that lenders calculate penalties – they’re actually all over the map – so expect the costs to vary from lender to lender. As well, there are different penalties associated with different types of mortgages. In addition, the size of your down payment and whether you opted for a “cash back” mortgage can influence penalties.
While breaking a mortgage and paying penalties based on the IRD can result in a break-even proposition in the short term, if you look at the big picture, you’ll see that the true savings are long term – as we know that rates will be higher in the years to come.
Have questions about refinancing or renewing your mortgage? We’re here to help.