So, you took out a mortgage a year, two or three ago. But you have seen some really low rates advertised. Is it too soon to look at refinancing?
Well, Canadians are becoming more savvy and value value-conscious. The days when people would take out a 5 year loan and stick with it for the entire term are becoming rare. Most homeowners now change their loan every four or five years, because they’re looking for a better deal, or new needs and circumstances arise.
In the last few years we’ve been enjoying some of the lowest interest rates in Canadian history, but that doesn’t automatically mean you should refinance your mortgage, and there’s no one size fits all approach that suits everyone.
However, it is important for homeowners with mortgages to keep their eye on the market and review their current financing arrangements at least annually.
In making a decision to refinance, there are a few things to consider:
What are your total Up-Front costs vs Long-Term Savings?
More importantly, how long will it take me to save these costs and be in to “net savings” with the lower proposed rate?
Refinancing only makes sense if it saves you money over the long term. However, there will likely be some up-front costs. Be certain and be clear on what those costs will be so you can calculate how much you will save with the lower interest rate. Sometimes you find that the costs will be more than the potential savings in making the change.
Fixed-rate loans
Always a good idea at the time, but a bad idea if rates went down since you obtained your mortgage. Hindsight as they say! Fixed-rate loans are usually more expensive to break than variable rate loans. The cost depends on how far into the fixed term you are, your current rate vs. today’s rates and other factors. However, they can be considerable. Check with your mortgage broker or existing lender to get a clear picture of the pre-payment penalty.
Interest rates
As a general rule, if you are considering refinancing, your trigger point should be at least 0.5% lower than your current rate. If this is the case, you need to have a serious look at your situation and calculate the potential savings to determine if this makes sense for you.
Short and Long Term Goals
Life changes and your needs are not static, no matter how much you plan. So, you have to evaluate not only to compare against your current rate, but also on whether you will need additional money in the future or even may be considering a sale and a move. There are many different loans and many different features. It’s important to consider what works best for you now, not what worked 2 or 3 years ago.
You may also be considering unlocking some of the equity in your property for renovations, education costs, a major purchase, family holiday or even purchasing another property.
Whatever your reason is to be considering refinancing, ensure that before you make any decisions that you are clear on:
- Your current interest rate
- Short, medium and long term goals
- Current interest rates and what it’ll cost to exit your current loan
- What other lenders can offer you, and any other costs involved with switching home loans.
Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.
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