When It Makes Sense to Do A Mortgage Refinance

When It Makes Sense To Do a Mortgage Refinance

It’s that time of the year when I talk a lot about mortgage refinances. Doing a mortgage refinance on your current home is a great option to look at if you want to decrease your high-interest debt or complete a home renovation.

Paying Off Higher Interest Rate Debt

With the Bank of Canada increasing Prime in 2022, your line of credit rate has likely increased as well. If you have higher interest rate debt to pay off like credit cards at 19.99% (or higher), or lines of credit with rates over 10%, let’s talk about refinancing.

Let’s get you out of the hamster wheel of minimum payments that are only covering the interest. Refinancing can help pay off higher interest rate debt to manage payments and free up cash flow!

With a mortgage refinance, you can refinance your home up to 80% of its value.  

Refinance Example

If your home value is $400,000, the maximum mortgage on a refinance is $320,000.

Your current mortgage payment is $1,647/month and your current balance is $295,000.

This leaves approximately $25,000 available equity that you can use.  

If you have $25,000 credit card debt, your interest payment is approx $400/month.  

You could refinance your home, pull out that $25,000 and pay off that high-interest debt for a new mortgage payment of approx $1,753/m.   

That clears up $300/month in cash flow. You can use this to pay down any other debt, save for a rainy day fund or do lump sum payments on your mortgage!

Cash Back Option

If there is not enough equity in your home to do a full refinance, there is an option to do a switch/transfer with a cashback option.

How does this work?  

Say your mortgage is coming up for renewal and your current bank is offering a renewal rate is 5.49%. Your payment has jumped significantly to $2,119.91/month from $1,567/month. You also have debt like a credit card or LOC or even another loan.  

We can look at a cashback option of up to 3% of the mortgage balance that you can use to pay off any other debt and help with cash flow.

Example 

Your current renewal offer is 5.49% with a $2,119.91 payment.  

A new mortgage of $310,000 with 3% cashback is $9,300.  

Interest on that debt at 19.99% is about a $155/month payment.   

The cashback mortgage rate is 5.59% with $2,137/month. The increase in payment is $17/month.   

With this cashback, the $9,300 in debt is paid down and the $9,300 is only repayable if you break the mortgage prior to the end of the term

This cash-back option is good as well if you want to do a bathroom or other reno. You can use the funds as you chose!

When Not To Do A Mortgage Refinance

There are a few times that refinancing your mortgage isn’t the best idea.

If you’re not planning on staying in your home for a long time, refinancing your mortgage might not make sense. Refinancing costs a percentage of the principal of your loan i.e. the cost to break your mortgage.

Typically, fixed-rate mortgages have higher prepayment penalties. In most cases, this penalty is the higher of either an interest rate differential (what rate you’re paying vs the current rate) or three months’ interest.

Whatever is higher, you’ll have to pay your lender. If you’re just starting your mortgage term, it’s probably too expensive to refinance, but if you’re closer to the end of your term or at your renewal, the math could make sense.

The best way to know if it makes sense to do a mortgage refinance or not is to give me a call. We can go through your options and the math to make sure it makes sense.