Refinancing your mortgage means you pay off your existing mortgage and replace it with another mortgage. Borrowers often refinance their mortgage for the following reasons:
1. To get a better interest rate.
2. To change the term of their mortgage (i.e. reduce the term or increase the term).
3. Convert their rate to a fixed or variable rate mortgage.
4. Tap into their property's equity to fund a project, down payment for another property or just access cash also known as “cash out refinance.”
If you choose to refinance your mortgage, you will have to pay a mortgage prepayment penalty, legal fees to have your lawyer register your new mortgage on title to your property, and appraisal fees.
Many people choose to refinance when interest rates drop really low. This is because over the long term, a lower interest rate will help them pay off their mortgage faster since their new mortgage payments will pay off more of the principal balance.
Another reason people refinance is to pay off debt through consolidation. Consolidating high-interest debt into a low interest rate mortgage helps with cash flow since making minimum payments each month on credit cards, for example, without paying down the balance can become a huge drain on finances both in the short and long term. You can access the equity in your home for debt consolidation and take on a very favourable monthly payment.
If you can reduce your interest rate by at least 1.5% to 2%, then in most cases, it would be a good idea to refinance.
Some borrowers also refinance to extend their amortization period to 30 years. Extending your amortization period helps with cash flow because it makes your mortgage payments lower.
If you want to explore a new mortgage loan for home renovations, debt consolidation, equity cash out, or to reorganize your mortgage by adding on a home equity line, please call or write today.
Sarah A. Colucci
Sr. Mortgage Advisor
Mortgage Edge, FSCO #10680
Direct: (647) 773-4849
What it means to renew your mortgage
When you get a mortgage with a lender, your contract is in effect for a specific period of time. This is called the mortgage term and it can range from a few months to five years or longer.
You have to renew your mortgage at the end of each term unless you pay the balance in full. You'll most likely require multiple terms to repay your mortgage in full.
Your renewal statement
If your mortgage contract is with a federally regulated financial institution, such as a bank, the lender must provide you with a renewal statement at least 21 days before the end of the existing term. Your lender must also notify you 21 days before the end of your term if they won’t renew your mortgage.
The lender will provide you with paper statements or electronic statements, if you consent to this method of communication.
A renewal statement must contain the following information:
You may receive a mortgage renewal contract at the same time as a renewal statement.
Review your mortgage needs
When your mortgage term comes to an end, you have to pay off your mortgage in full or renew it. This is a good time to review your mortgage needs and make sure you have the right product.
To help you find the right mortgage, consider if:
You don’t have to renew your mortgage with the same lender. You can move your mortgage to another lender if their conditions better suit your needs.
Start shopping around a few months before the end of your term. Contact various lenders and mortgage brokers to check if they offer mortgage options that better suit your needs. Don’t wait until you receive the renewal letter from your lender.
Negotiate for a better interest rate
Negotiate with your current lender. You may qualify for a discounted interest rate that is lower than the rate quoted in your renewal letter. Tell your lender about offers you received from other financial institutions or mortgage brokers. You may need to provide proof of the offers you receive. Make sure you have this information on hand.
If you don’t take action, the renewal of your mortgage term may be automatic. This means you may not get the best interest rate and conditions. If your lender plans on automatically renewing your mortgage, it will say so in the renewal statement.
Switching to another lender
You may decide to switch your current mortgage to another lender for a loan of the same amount. If this is the case, the new lender will need to approve your mortgage application. The new lender may use different criteria than your original lender to decide if you qualify for a mortgage.
Costs to change lenders
Make sure you find out the costs of changing lenders, such as:
Mortgage loan insurance premiums when you switch lendersYou may have to pay a new mortgage loan insurance premium when you switch lenders, if:
You need to sign the registration documents that are part of your mortgage contract. You may have to meet with your lawyer or notary.
Switching mortgage lenders if you have a collateral charge
Your mortgage can be registered with a collateral charge. If that’s the case and you want to switch lenders, you may have to pay fees. These fees cover the removal of the charge from your existing mortgage and the registration of the new one.
You must meet certain criteria to remove the charge from your mortgage. You must repay in full or transfer to the new lender all loan agreements secured by the collateral charge. This includes car loans or lines of credit.
To find out if your mortgage has a standard or a collateral charge, ask your lender, lawyer or notary. Allow a few months before your renewal date. This will allow you time to consider your options based on how your mortgage is registered.
A mortgage deferral is an agreement between you and your financial institution. It allows you to delay your mortgage payments for a defined period of time.
After the deferral period ends, you resume making your mortgage payments. You also have to repay the mortgage payments you defer. Your financial institution determines how you repay the deferred payments.
This can include:
This means your regular mortgage payments can be higher, depending on how you need to repay the deferred payments.
During the deferral period, your financial institution continues to charge interest on the amount you owe. They will add this amount to your outstanding mortgage balance. With a higher mortgage principal, your interest fees are higher. This could cost you additional thousands of dollars over the life of your mortgage.
If you expect to continue to experience financial hardship once your mortgage deferral period ends, consider your options now.
Who can apply for a mortgage deferral?
Financial institutions assess the eligibility criteria for mortgage deferrals on a case-by-case basis.
You may be eligible for a mortgage deferral if:
Your financial institution’s decision to provide you with relief on certain products is ultimately a business decision.
For information on the actions undertaken by your financial institution during the COVID-19 pandemic, contact them directly. You can also visit their website. Most financial institutions have a dedicated web page with information on their response to COVID-19.
What to expect when you defer your mortgage?
Your mortgage payments include the principal and the interest. It may also include your property tax payments and fees for optional insurance products. Deferring your mortgage payments can have an impact on each of these financial commitments.
The principal is the amount of money you borrow from a financial institution. With a mortgage deferral, you don’t pay the principal. Instead, you are delaying the payment of this amount. For example, assume you owe $300,000 in principal at the beginning of the deferral period. At the end of the deferral period, you will still owe $300,000, plus interest.
The interest is the cost you pay to borrow money from a financial institution.
To calculate your interest costs, your financial institution uses:
You pay interest on the principal. When you defer your mortgage payments, you pay interest on the new principal amount, which includes the deferred interest. The interest on the deferred interest is called interest on interest. Some financial institutions agreed to refund the interest on interest. If your financial institution calculates interest on interest during the deferral period, ask them if a refund is available.
In either case, your mortgage principal will be higher than before the deferral period. This means you pay more interest over the life of your mortgage. This amount can add up to thousands of dollars over the life of your mortgage.
You may pay your property taxes through your financial institution. This can be a requirement of your mortgage contract, or an option you selected. When your financial institution makes your property tax payments on your behalf, the amount is part of your mortgage payments.
Your financial institution may allow you to defer your property tax payments. If they don’t, you have to continue to pay the property tax portion of your mortgage payments.
Some municipalities offer property tax deferral programs. If you can’t afford your property taxes, contact your municipal office.
Optional credit insurance
You may have opted to buy optional credit insurance. When that’s the case, your financial institution includes the credit insurance fee in your mortgage payments.
Your financial institution may allow you to defer your credit insurance payments. If they don’t, you have to continue to pay the credit insurance portion of your mortgage payments. If you can’t afford your credit insurance, talk to your financial institution.
Find out more about credit and loan insurance.
Cancelling your mortgage deferral early
You may wish to cancel your mortgage deferral before the end of the deferral period. This can be the case if you are no longer experiencing financial hardship or if your financial situation has changed. This can help you reduce the additional interest costs resulting from a mortgage deferral.
Some financial institutions allow the cancellation, others don’t. Contact your financial institution for more information.
If your financial institution doesn’t allow you to cancel your mortgage deferral, consider your options. Many financial institutions allow you to repay the deferred amount without paying a penalty.
You can minimize the cost of additional interest by:
Read your mortgage contract and speak to your financial institution about the options available to you. You may be eligible for one, or a combination of the options offered by your financial institution. Keep in mind that if you make changes to your mortgage contract, you may have to pay fees.
Financial institutions look at situations on a case-by-case basis.
Extending your amortization period
The amortization period is the length of time it takes to pay off a mortgage in full. Extending your amortization period lowers your mortgage payments. Keep in mind that the longer you take to pay off your mortgage, the more you pay in interest.
Your mortgage amortization period may only be extended to the maximum amount, usually 25, 30 or 40 years. This maximum amount depends on whether your mortgage is insured or uninsured. It also depends on your financial institution.
Find out more about mortgage amortization.
Opting for the blend to term or blend and extend option
Some financial institutions offer blended options. With these options, your financial institution calculates a new interest rate based on your mortgage rate and the current rate. This lowers your mortgage payments if the current rate is lower than your mortgage rate.
With a blend to term option, your new interest rate is in effect until the end of your term. Your mortgage term is the length of time your mortgage contract is in effect.
You may be able to extend the length of your mortgage before the end of your term. This allows you to benefit from your new interest rate for a longer period. Financial institutions call this early renewal option blend and extend.
Find out more about the blend and extend option.
Converting to a fixed rate
You may be able to convert your mortgage from a variable to a fixed interest rate. If the current fixed rate is lower than your mortgage’s current variable rate, your payments can be lower. This option also protects you if there is a sudden increase in interest rates.
Speak with your financial institution and check your mortgage contract to see if this option is available to you.
Find out more about protecting yourself if interest rates rise.
Making special payment arrangements
Your financial institution may offer special payment arrangements unique to your situation. With this option, you and your financial institution agree to recover late payments over the shortest period, within your capacity. Special payment arrangements can include reducing your mortgage payments for an agreed-upon time.
Skip a payment
Your financial institution may offer a skip a payment option. This option is similar to a mortgage deferral, but for a shorter period. Typically, with a skip a payment, your financial institution allows you to defer 1 or 2 mortgage payments each calendar year. For more information, read the terms and conditions of your mortgage contract or speak to your financial institution.
Extended mortgage payment deferral
Extended mortgage payment deferrals are for a longer period than the standard deferral period. You may be able to defer your mortgage payment beyond the allowed period.
Usually, you can only defer your payments up to a predefined amount. After you reach this amount, you have to start making your regular payments again.
If you have an insured mortgage, the financial institution needs approval from the insurer before approving your request.
Interest only payments
Interest only payments allow you to defer the mortgage principal. However, you continue to pay the interest on your mortgage. Your financial institution may allow you to defer your mortgage principal up to a maximum amount. They may also require that you repay the deferred principal over a specific timeframe.
This option can significantly increase the cost of your mortgage.
Prepaying and re-borrowing
You may have made prepayments during your current mortgage term. If that is the case, your financial institution may allow you to re-borrow the amounts you prepaid. This amount could help you make your mortgage payments.
Creditor insurance claim
You may have optional credit insurance on your mortgage. If that’s the case, you may qualify for a creditor insurance claim. This can apply if you lost your job or became ill. You must meet some conditions for your claim to be approved. For example, you may not qualify for a claim if your employment relationship is not permanently terminated.
If your insurance company approves your claim, the payments typically start after a waiting period. This is usually 60 days. There may be a maximum monthly benefit. Most financial institutions offer job loss insurance for a maximum of 6 months. There may also be a limited number of months for which your insurance benefits apply. Some financial institutions require that you submit your claim within a limited period, following a job loss.
Check with your financial institution the rules for creditor insurance claims during hardship.
Find out more about optional mortgage insurance products.
Your financial institution may allow you to add late payments to your mortgage principal. This is often referred to as capitalization. Typically, you can only use this option once during the life of your mortgage.
Your financial institution may allow you to capitalize:
Home equity line of credit (HELOC)
HELOCs are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit.
A HELOC has a variable interest rate. HELOCs typically allow for interest-only payments, which may seem like a good option. However, using a HELOC to make your mortgage payment can put you at risk.
At any time, your financial institution could decide to lower your HELOC limit. They can also ask you to pay the difference immediately.
Sale by borrower plan
With this plan, your financial institution allows you to sell your property for fair market value to a third party. You continue to live in your home while it’s for sale. This is typically for a period of 90 days or less. During this time, you agree to occupy and maintain the home. You may need to continue to make payments or partial payments toward the mortgage.
Mortgage insurance tools
If your down payment was less than a 20% of your home’s purchase price, you had to get mortgage insurance. This insurance protects the financial institution in case you can’t make your payments. There are 3 mortgage insurance providers in Canada. They have programs in place to help you if you are having difficulty making your mortgage payments.
Learn more about the programs offered by the mortgage insurance providers:
Check your mortgage agreement to see which mortgage insurance provider is associated to your mortgage.
Article written by: https://www.canada.ca/en/financial-consumer-agency/services/mortgages/mortgage-deferrals.html
Canada, F.Canada, F. (2020) Mortgage deferrals - Canada.ca, Canada.ca. Available at: https://www.canada.ca/en/financial-consumer-agency/services/mortgages/mortgage-deferrals.html (Accessed: 10 February 2021).
The Mortgage Stress Test is a requirement by the Federal Government to qualify for a mortgage at a higher interest rate. Currently, the stress test rate is the Bank of Canada’s 5-year benchmark rate of 4.79% or 2% more than the contract rate, whichever rate is greater.
If you require mortgage default insurance or are applying with big banks, you will need to qualify using the current stress test guidelines.
Are there lenders that don’t have to use the Mortgage Stress Test?
Yes. The Mortgage Stress Test applies to all federally regulated financial institutions. Some credit unions in Ontario are regulated by the Provincial Government, which means if a borrower is seeking a conventional mortgage loan, they may not need to be stress-tested.
If you are having issues qualifying for a certain mortgage amount, speak to your mortgage broker about which credit unions won’t use the stress test. If this option still doesn’t work for you, consider alternative lenders.
Although alternative mortgage lenders still have to use stress-tested mortgage rates, they often have extended qualifying ratios which help people renewing a mortgage or buying a home who have more than a 20% down payment get a mortgage.
If you have questions about qualifying for a mortgage, call or write today.
Although your mortgage is amortized to twenty-five or thirty years, it surely doesn’t mean it should take you that long to pay it off.
In my experience working with borrowers from every income level imaginable, a common reason borrowers don’t pay off their mortgage faster is because they aren’t aware of how to do so. It has nothing to do with money and running into significant wealth, as some people believe. It’s really all about taking the same proactive steps consistently.
Every mortgage borrower should map out a plan to become mortgage-free in their desired time frame. So, for example, if you want to become mortgage-free in 15 years, you need to map out steps you will take to reduce your mortgages’ amortization period to 15 years.
I can help you produce a successful plan that is very easy to maintain.
Here are the ways I help borrowers to get out of mortgage debt quickly:
Get rid of high-interest debt.
One way I help people recover more money each month so they can redirect it to their mortgage is through debt consolidation. High-interest unsecured debt is a roadblock.
Minimum payments are highly unsuccessful in paying off the actual debt, so borrowers find themselves trapped in a cycle of making minimal monthly payments but never getting out of debt.
Pay your mortgage based on a shorter amortization schedule.
Yes, mortgages can be amortized out to 30 years, but you don’t have to pay your mortgage based on that time-frame.
Depending on your financial situation, we can set your payments to a shorter amortization period so you end up making prepayments and reduce your mortgage balance quicker.
I don’t recommend changing your original amortization length because, in the event you lose your job or run into an unexpected situation where cash-flow is restricted, you can change your payment back to the lower amount without consequence.
Change your payment frequencies.
You don’t have to pay your mortgage at a monthly frequency if it was registered that way. The more time between payments, the more interest you will pay. Therefore, speeding up your payment frequency will reduce your interest payments.
Pay your own property taxes.
Many people have their mortgage lender pay their property taxes for them to ensure they don’t fall behind on property tax installments. The tax payments are collected with the mortgages’ principal and interest payment each month.
Unfortunately, the property tax installment is higher than the actual property tax amount because the lender likes to keep a surplus in a tax account to pay any increase in taxes year after year without changing the scheduled monthly payment. This takes away from cash-flow each month which can be redirected to lowering the mortgage balance.
Tip: You can set up a pre-authorized payment plan directly with your town or municipality to avoid paying more than you have to each month for property taxes.
Please speak to me today. Call 647-773-4849 or email me at email@example.com
I look forward to working with you.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929