When should you refinance your mortgage?

Thinking about refinancing your mortgage in Canada? It could be a smart financial move that helps you save money and reduce your monthly payments. But if you're feeling a bit lost in the process, you're not alone.

Refinancing can be complicated and confusing, especially if you're not familiar with the ins and outs of the mortgage industry. Whether you’re a seasoned homeowner or just starting out, here’s what you need to know about refinancing in Canada. 

What does it mean to refinance your mortgage?

Refinancing a mortgage in Canada essentially means renegotiating your current mortgage with a new one, usually with better terms and conditions. But, when you refinance your mortgage, you can also tap into your home’s equity and borrow money if you need to pay off or consolidate other debts, renovate your home, or simply reduce your monthly payments. 

However, you'll need to go through a new approval process with your lender–including the mortgage stress test–and they'll likely want to see your credit score and employment information to ensure you can handle the new mortgage terms. 

Keep in mind that refinancing your mortgage may come with fees and penalties–especially if you refinance before the end of your mortgage term–so it's important to calculate ahead of time and see if it fiscally makes sense. 

What factors can impact my refinance application?

When you apply to refinance your mortgage, there are a lot of factors that lenders will consider before approving your application. And while it can feel overwhelming to keep track of everything, understanding these factors is important if you want to increase your chances of getting approved for a mortgage refinance.

Your credit history

If your credit has gotten worse since your last application, your lender might consider a refinance too risky. Even if your score is sitting at or above what it was, a history of late payments or too much debt on your profile could lead your lender to deny your application. It’s important to stay on top of your credit history, that way you know if you’ll need to make any changes to give yourself a better chance of getting approved with future loan applications.

Your home’s value

If your home has increased in value, you may be able to refinance and cash out the new equity in your home. However, if your home has decreased in value, you typically can only refinance up to 80% of your home’s value as it may continue to decrease in value. Try this free home valuation tool.

Your debt ratios

If you carry too much debt for your income, there might be a chance your lender will likely decline your application. A refinance is a new loan application, so your lender will treat you like a new client and recalculate if you’ll have enough cash to afford your new loan terms. It’s important to look at your debt ratios–your GDS and TDS–and ensure they stay under 39% and 44%, respectively.  

If you have missing or unverifiable information

If your application is incomplete or missing required documentation, your lender might simply deny your refinance. Be sure to include all the requested information and paperwork, as your lender will need to verify your financial and employment history before considering your loan. 

Your cash on hand

When you refinance a home, you often have to bring some cash to the table to pay for fees and closing costs to close the new loan. Sometimes, your lender will be willing to roll these costs into your loan or give you a credit in exchange for charging you a higher interest rate. This isn’t always an option, though, and “insufficient cash” is a fairly common reason lenders deny refinance applications.

When should I refinance?

Refinancing your mortgage can be a smart move if it makes sense for your financial situation. But how do you know when it's the right time to refinance? There are several factors to consider:

When interest rates are low

If interest rates have fallen since you took out your original mortgage, refinancing could help you take advantage of lower monthly mortgage payments and save money over the life of the loan.

When your home has increased in value

If your home has increased in value, refinancing could help you access the equity in your home tax-free and use it for home improvements, debt consolidation, to pay for your child’s tuition, to buy a car, or other expenses.

When your credit score has improved 

If your credit score has improved since you got your original mortgage, refinancing might be worth considering. This is because a better credit score can help you qualify for a lower interest rate on your mortgage. In Canada, the credit score you need to get a mortgage can vary depending on the lender, but generally, a score of 680 or higher is considered good. With a good credit score, you might be able to get a better interest rate on your mortgage, which could mean lower monthly payments and potentially saving thousands of dollars over the life of the loan. 

When you want to lower your monthly mortgage payments 

If you’re hoping to reduce your monthly budget, refinancing to a longer amortization could be a good option. This will help reduce your monthly mortgage payments, which is great if you’re looking to get a hold of your finances month-to-month. 

When you want to pay your mortgage off faster

On the flip side, if you’re hoping to pay off your mortgage faster, you could also opt to extend your amortization period to do just that. Doing this can also help you save on the interest payments you’ll be making, in the long run. 

The bottom line…

If you're wondering whether refinancing your mortgage is a good idea, the answer is that it can be! You could end up with lower monthly payments, a reduced interest rate, and more money in your pocket in the long run. And while refinancing does have many benefits, always take a second to  look at your own finances--then do your homework and work with a lender you can trust. If you’re wondering if refinancing is the right choice for you, please reach out to one of our mortgage agents at Pine.