Q & A with Sarah Colucci
Why do homeowners refinance?
Homeowners often choose to refinance their mortgage for various reasons including consolidating high interest debt, taking out equity in their home, investing in real estate or completing home renovations.
Is refinancing common?
Yes, it is. In fact, as many as one out of three homeowners will refinance their existing mortgage before it has matured.
Is it true that borrowers will have to pay a penalty to refinance?
To refinance, your existing mortgage must be broken or “blended and extended”, which I can also explain.
To break your mortgage early will trigger a prepayment penalty. If you have a variable rate mortgage, usually the penalty amounts to three months worth of mortgage interest. If you currently have a fixed rate mortgage, you will be charged either three months worth of interest OR the Interest Rate Differential, whichever is greater.
Depending on how your current financial institution calculates prepayment penalties, the payment may be reasonable or very expensive. As mortgage brokers, we can help you sort through your prepayment penalty to ensure you understand the numbers calculated by your current mortgage holder.
If I had a lot of credit cards, for example, and wanted to consolidate debt, how could I figure out if I should refinance or not?
That’s a really good question. Because refinancing your mortgage means breaking your mortgage contract in most cases, some people may think it’s too expensive. Once you consider legal fees and appraisal costs plus the penalty, it may seem as though refinancing is not the answer.
However, each case is very different. If your someone who has a few credit cards at 19.999% interest, for example, and a monthly payment that is just interest, consolidating makes sense when you consider how much interest you will pay in just a year. Some people forget that credit cards were designed to keep borrowers in debt forever, and many people, unfortunately, fall into this trap.
Consolidating also can help people recover necessary cash flow each month which can help them “breathe.” Most people live pay cheque to pay cheque so it’s important that my clients are set up to have the additional funds to maintain liquidity in the bank and pursue other, more lucrative investments.
Refinancing at my office is usually part of a bigger strategy for the client. My goal is to help borrowers reduce their total mortgage balance and interest payment every month.
Is it true that big banks like Royal Bank and CIBC, for example, have the most expensive pre-payment penalties?
They can be, yes. Big banks use the Bank of Canada’s posted rates to calculate their penalties. When calculating the interest rate differential which I explained before, this can seem as though the client got a bigger discount off their mortgage rate than they actually did. This, in turn, triggers a larger penalty.
You mentioned “blend and extend” - what does this mean?
Sometimes, if a client can stay with the same financial institution, as in they still qualify with them, I can mitigate a penalty by keeping them with their bank. In this case, they avoid paying a penalty because instead of breaking the mortgage, they just increase the principal amount and blend their old rate with the new rate on the percentage of new money they are asking for.
How can people get in touch with you?
Usually, I am available through social media direct messaging such as Facebook or Instagram and of course email at firstname.lastname@example.org. To speak directly, borrowers can call me at (647) 773-4849.
By: Greg Thomas, Financial Planner