Is it time to refinance your mortgage?
If you have found yourself in a time of financial hardship, you are not alone. With an unemployment rate of 10.9 per cent in July of 2020, not everyone is back to full-time hours after the reopening of the provinces. We typically talk more about buying your first home and the more positive sides of finance. Unfortunately, with the current market, what happens if you’re already a homeowner and you find yourself facing financial hardship? Maybe it’s time to refinance your mortgage.
Even in situations where you aren’t struggling financially, there are many situations where you might benefit from refinancing your mortgage. There are a few common reasons people refinance their mortgage. Some reasons are to consolidate debt, access the equity in your home, or to lock in a better interest rate. With mortgage interest rates at an all time low, many borrowers could save money long-term by refinancing. Refinancing can also provide an opportunity to pay off higher-interest debt.
Let’s explore some of the different reasons you might want to refinance your mortgage. We will also review some of the advantages and disadvantages of each option!
Gain access to secured lines of credit
A Home Equity Line of Credit (HELOC) provides borrowers with low-interest, revolving, access to credit. A HELOC can help you free up the money for home renovations, tuition costs, or an option to have access to credit if you need it in the future. With a HELOC, you are able to access up to 65 per cent of the current value of your home. It is important to note that your HELOC and outstanding mortgage balance cannot be more than 80 per cent of the value of your home. HELOCs provide access to revolving credit at a much lower interest rate than unsecured loans.
If you are considering taking out a HELOC for any of these reasons you should speak to a mortgage broker to understand the downsides. It’s easy to treat a HELOC as another bank account and this can hinder your financial progress. Like most things in finance, a HELOC is a tool you can leverage to achieve a goal. It’s important to understand your motivations for taking on any form of debt and make sure it is the best product for your situation.
Consolidate your debt
In 2019, the consumer debt delinquency rate in Canada on average hovered around 14 per cent. This means that many Canadians are struggling to repay their debt. Sometimes this is due to changes in cash flow that can impact the ability to pay bills on time. Refinancing your home to pay off some of your higher-interest debt can help you improve your financial situation. This is different from a HELOC as it is not a revolving source of cash. If you get into similar debt issues again, you may have less options in the future.
Consolidating your debt does not solve debt issues. It just defers the repayment. By reducing the interest you pay on your debt, you will contribute more to your principal balance, or decrease the size of your payments. It is important to review your goals with an unbiased mortgage broker to make sure that rolling debt into your mortgage is the right option for you.
Save money on interest rates
With interest rates at all time lows, you may benefit by refinancing your mortgage. If you have a rate higher than 2.59 per cent you might be able to save money on interest. This is a general assumption as there are a number of things that need to be in order for this to make sense. It is important to speak to a mortgage broker to determine whether the process, and penalty to break your existing mortgage, is worth the savings.
Negotiate new mortgage terms
Perhaps your income has increased and you want to be able to increase your payment amount. Alternatively, you might find yourself worrying about changing variable interest rates. Whatever the reason, refinancing your mortgage will give you the opportunity to renegotiate the terms of your mortgage.
You might want to switch from a variable rate product to a fixed rate product, or shorten the amortization period. Maybe you have different goals and are planning on selling your property before your next mortgage renewal. Speaking to a mortgage broker will help you understand your options and make sure that your mortgage fits your lifestyle.
Is there a right time or reason to refinance?
Like most financial decisions, it’s complicated, and it depends on your situation. To know whether refinancing is the right plan for you, you have to consider your financial situation. This includes having an understanding of what products are available to you. This is especially true of those considering refinancing to manage financial hardship. It’s a good idea to speak to a mortgage broker to review your existing mortgage, and discuss the options available to you.
You should think about how your mortgage will impact your quality of life. Is it doable but unpleasant, or would it leave you in shambles? You need to understand your options and to make sure refinancing your mortgage will help you achieve your short term and longer term financial goals.
If you have any questions about whether or not it’s time to refinance, or finding the right products, you should speak to an unbiased mortgage broker! If you are looking for some help with your refinance, give me a call at (705) 333-4338 or get in touch with me here!