A remortgage is when you replace your current mortgage with a new one for the same or more money. Remortgaging in Canada gives you the opportunity to get better interest rates and terms.
When your remortgage amount is the same as what you owe on your present one, it is referred to as a renewal. When you want to increase the amount you owe with a remortgage—to release part of the equity in your home—this is also known as a refinance mortgage.
How Does a Canada Remortgage Work?
Mortgages in Canada normally have a period of one, three, or five years. You have the option to refinance with a different lender at the end of this period. You can remortgage at any time, but the most cost-effective period is when your current mortgage term expires.
There will be a prepayment penalty if you pay off your mortgage before the term is up. The amount will be determined by the remaining term, the rate, whether you have a fixed or variable mortgage, and the prepayment policy of your bank.
The penalty might be as little as $1,658 if you have a $200,000 mortgage amount and a year left on your term with a rate of 2.79 percent. With four years remaining on the term, the penalties could be as high as $8,263.
Contact your bank to find out how much the penalty will be before breaking your mortgage or use our mortgage penalty calculator.
You effectively change the terms or amount of your mortgage when you refinance your home. Your new lender cancels your old mortgage and replaces it with a new one.
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Why Would You Take Out a Remortgage?
Any remortgage should help you better your financial status in some way. The following are some of the most prevalent causes for remortgaging in Canada:
- To obtain lower borrowing rates by shopping around with alternative lenders. You can also try to improve your existing lender’s rates by haggling with them. Remortgaging in Canada can also help you lock in cheaper interest rates before they rise in the future.
- To take advantage of some of your home’s equity by borrowing up to 80% of its worth.
- To get money while you’re retired. Retired Canadians can refinance their homes to increase their income and live the retirement they’ve always dreamed of.
- To pay off a mortgage more quickly through a shorter amortization or improved prepayment options.
People sometimes utilize a remortgage in Canada to save money by consolidating high-interest debt in order to have some extra money to cover major bills. Others use the money to fund renovations, acquire assets or a second home, assist family members with wedding or education expenses, or go on vacation.
What are the Pros and Cons of a Remortgage in Canada?
Before opting for a remortgage it is important to understand the benefits and drawbacks of this type of mortgage.
- Paying a reduced interest rate or merging expensive debt (such as credit cards) into significantly less expensive debt can help you save money.
- If you re-mortgage with a shorter amortization time or stronger prepayment options, you can be debt-free sooner.
- Remortgaging your home to release some of its equity is usually less expensive than taking out other types of loans.
- A larger mortgage means greater payments, which reduces your monthly disposable income.
- The new “stress test” for mortgages makes it more difficult to qualify for the same loan. New lenders may not be willing to lend you more money, or even the same amount as your current loan.
- Prepayment penalties might cost you hundreds of dollars if you refinance before your current mortgage term is out.
Costs of Getting a Remortgage
The cost of refinancing your mortgage is determined by the process you employ to gain access to equity or reduce your interest rate. Legal fees will always be incurred, regardless of which approach you select, because a lawyer must update the financing on title.
The good news is that many brokers and/or lenders will reimburse this expense if your mortgage balance is larger than $200,000.
Your lender will charge you a prepayment penalty if you break your mortgage in the middle of your term to get access to equity or lower your interest rate. The larger of three months interest or the interest rate difference payment applies to fixed mortgage rates (IRD). This is three months’ interest for variable mortgage rates.
What is the Difference Between Renewing and Re-mortgage?
When it’s time for your mortgage to be renewed, you agree to re-sign with your current lender at the rate offered (or negotiated) for the same mortgage terms and conditions.
A remortgage is when you break your present terms and conditions in order to construct a new mortgage with new terms and conditions, whether with the same lender or with a different one. It can be done at any time during the term of your mortgage or at the time of renewal, with varying fees or penalties.
Depending on what you wish to modify, your lender may authorize a mid-term refinance (also known as a ‘blend-and-extend’) if you have a few years left on your current mortgage term (charges may apply).
Types of Re-mortgage Products Available in Canada
Many lenders provide a wide range of remortgage solutions, including those for high-risk or self-employed clients. Because different mortgage programs are best suited for different situations, it’s important to seek guidance from a mortgage specialist to establish which one is right for you.
Make sure you do your homework and ask a lot of questions about these services so you know what to expect when you remortgage your home. The following are examples of remortgage options:
- Second mortgage refinancing
- Remortgages for investment or rental properties
- Combination mortgages and home equity lines of credit
- Equity-based private mortgages
- Sub-prime mortgages
- High ratio and interest-only mortgage products
Alternatives to Mortgage Refinancing
If the costs of refinancing are prohibitive, there are a few other options you can consider:
- Blend and Extend
Through a blend-and-extend option, some lenders allow you to renegotiate your interest rate before the end of your mortgage term. By combining the new lower interest rate with the old one, you can extend your existing mortgage term at a lower rate while avoiding prepayment fees.
- Apply for a HELOC
A home equity line of credit allows you to borrow against the value of your property. You must have at least 20% equity in your house to be eligible, and the maximum credit amount is 65 percent of the home’s market value.
You can get a HELOC on top of your existing mortgage, which means you won’t have to incur prepayment penalties or break your mortgage. The interest rate on a HELOC is usually greater than the rate on a mortgage refinance.
- Get a Second Mortgage
A second mortgage is another way to get into your home’s equity. It’s granted on top of your primary loan, so there are no prepayment penalties. However, interest rates are greater than a mortgage refinance or a home equity line of credit (HELOC).