The Benefits of Refinancing a Mortgage in Ontario
After a long, expensive haul, it seems like the smell of interest rate cuts could be in the air. But for Canadians dealing with the burden of high interest rate cuts right now, another solution could offer relief. Refinancing a mortgage might sound like financial jargon, but it’s a tool that brings significant benefits to homeowners in Ontario, Canada. Whether you’re looking to save money, manage debt, or tap into your home’s equity, understanding how mortgage refinancing works can help you make informed decisions about your financial future. Let’s break it down in simple terms and explore if a mortgage refinance is right for you.
What is a Mortgage Refinancing?
Mortgage refinancing involves replacing your current mortgage with a new one, usually with a larger balance and different terms. These terms can mean a new interest rate, a different repayment period, or a switch from a variable to a fixed-rate mortgage. Essentially, it’s a way to adjust your mortgage to better suit your current financial situation.
What are the Benefits of a Mortgage Refinance?
1. Lower Interest Rates
One of the main reasons homeowners choose to refinance is to take advantage of lower interest rates. Interest rates fluctuate over time, and if rates have dropped since you took out your original mortgage, refinancing can reduce your monthly payments and the total amount of interest paid over the life of the loan.
It’s unlikely that your interest rate at the time of signing is higher than rates today – but where this gets useful is for those who had to agree to new mortgage terms in the past year. As rates now hopefully continue their path downward, there will be a point in the next year or two where those who had to accept the higher interests of 2023 & 2024 can renegotiate at a lower rate. Plus, the closer you are to the end of your current term, the less you will have to pay in penalties to break your current agreement.
Example: If your current mortgage has an interest rate of 4.5% and you refinance to a new rate of 3.0%, you could save thousands of dollars over the term of your mortgage.
2. Shorten the Amortization
Refinancing can also allow you to shorten the overall length of your mortgage. By moving from a 30-year mortgage to a 15-year mortgage, for instance, you can pay off your home faster and reduce the amount of interest paid. Keep in mind that this option will come with higher monthly payments, so not all budgets may allow for such a drastic reduction. But even shaving off 5 years (30 years to 25 years) will save you thousands of dollars in interest.
3. Switch from Variable to Fixed Rates
Variable-rate mortgages have interest rates that fluctuate with the market, which can be unpredictable. Refinancing to a fixed-rate mortgage provides stability, as your interest rate and monthly payments remain the same for the entire term. For those that endured the last few years of hikes, as interest rates settle back down, it may be time to consider if a fixed rate option would grant your family more peace of mind in the future.
4. Access Home Equity
Refinancing can also allow you to access the equity in your home. Home equity is the difference between the market value of your home and the outstanding balance of your mortgage. You can use this money for a variety of purposes including home improvements, education expenses or consolidating higher-interest debt.
Example: If your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity. Refinancing can let you tap into a portion of this equity, providing you with extra funds.
5. Debt Consolidation
We’ve saved perhaps the best benefit for last. Post-COVID Canada has presented challenges to households across the country. We’re battling the high costs of inflation coupled with the highest interest rates in decades. This has caused many to rely on credit products to get through. For homeowners with high-interest debt balances, such as credit cards, lines of credit or personal loans, refinancing can be a smart move to consolidate these debts into your mortgage. This can result in a lower overall interest rate and more manageable payments.
Example: By consolidating $20,000 of credit card debt at 19% interest into your mortgage at 3%, you can significantly reduce your monthly debt payments – and put more of your payment towards the principal amount you owe.
Things to Consider
While refinancing can offer numerous benefits, it’s good to be aware of the costs and potential downsides. If you are not near the end of your current mortgage term, you will need to factor in the penalty associated with breaking your mortgage. Also, entering into a new mortgage product will require an appraisal as well as the legal registration of the product, both which come at a cost. It’s crucial to calculate whether the long-term savings outweigh these initial expenses.
To get the most out of your mortgage refinance, we recommend comparing offers from different lenders to find the best terms and rates. This is also a great time to make use of online calculators to get an idea of actual dollar amounts associated with each option – or better yet, consult with a mortgage broker to understand the full financial picture right from the start.
If you’re considering a mortgage refinance, consulting with a mortgage professional can provide personalized advice and help you make the best decision for your situation. At Buckley Mortgage Broker, we are dedicated to the customer experience and bring a wealth of knowledge to each interaction. With access to more than 70 lenders, we can find the right mortgage product for your refinancing needs. Reach out to get started today!
