By: Bardia Andalib & Regina Ledesma | May 21, 2021 | Photo Credit: Katie Walker Interiors  @torontostaginggroup

According to Investopedia, to refinance (or ‘refi’ for short) is the process of revising and replacing the terms of an existing mortgage. This means that through the refinancing process, your first loan is paid off while your second loan replaces it. One may choose to refi if they are effectively seeking to make beneficial changes to their interest rate, payment schedule, or other terms.

Canadians today face so many reasons why they should consider refinancing their mortgage. For example, you may have raised your credit score and now qualify for a new mortgage with a better discount. Or you may want to fix your payments by changing from a fixed rate mortgage to a variable rate mortgage. With that said, here are some of the motives why homeowners refinance their mortgages.

Here are 25 things to know before you refi:

Getting Prepared

1. Consider Your goals & Why You want to Refi

Your first step is to decide what you want to accomplish. Since refinancing your mortgage comes with costs, it’s important for a homeowner to determine whether refinancing is a wise financial decision. 

Get a Lower Interest Rate 

With interest rates this low, chances are the mortgage rate will have dropped since you first received your loan. Reducing your interest rate not only helps you save money and lower your monthly mortgage payments, but can also increase the rate at which you build equity in your home. Additionally, lowering the interest rate also increases the principal payment and lowers the interest payment.

Let’s take a look at an example…

A 30-year fixed rate mortgage with an interest rate of 3.29% on a $400,000 home has a principal and interest payment of $1,657. That same loan at 1.5% would reduce your payment to $1,311.

Consolidate Your Debt
When you refinance your existing mortgage and take out the difference in cash, you can pay off high-interest credit card debt. In fact, many homeowners choose this option and access the equity in their homes to cover major expenses. In general, replacing high interest debt with a lower interest rate is a good idea. However, you will need at least 20% equity in your home in order to cash out a refinance mortgage.

Buy Another Home
Refinancing to build your real estate portfolio is a strategy that many homeowners explore. After years of paying off their mortgage, having their home value increase and their loan-to-(home) value decrease some homeowners are in just the right situation to have refinancing make sense and are given the opportunity to make their dream of real estate investing possible. 

2. Understand the Types of Refinancing

Rate-and-Term
A rate-and-term refinance changes the term, the interest rate – or both the term and the interest rate – of an existing mortgage. It’s also known as a “no cash-out refinance” because it does not advance any new money. When interest rates lower, that is usually when a rate-and-term refinancing occurs. Additionally, If your credit has substantially improved, then you may be able to refinance at a lower interest rate.

Cash-out-Refinance
A cash-out-refinance takes equity out from your home for you to use. This is done when your old mortgage is replaced for a new one with a larger amount than owed on the previous loan. This kind of refinance works best when the value of your home has increased because of the rising real estate market. But it can also be done if you are well along in the mortgage and have paid a significant amount of the existing mortgage. 

Cash-in-Refinance
What if you don’t have 20% equity in your home yet but still want to refinance to lock in a better rate or obtain lower monthly payments? That’s when a cash-in refinance comes in. With a cash-in-refinance, you make a larger payment toward your principal; to lower your loan-to-value ratio (LVT) and become eligible to refinance.

Let’s take a look at an example…

You have an appraiser come look at your home and he/she says the property value is $800,000. But, because you still owe $760,000 on your mortgage, your LTV ratio is 95%, meaning you have 5% equity in your home.

You can do a cash-in-refinance and pay $120,000 all at once to lower your principal balance to $640,000. Now your LVT ratio is 80% and you have 20% equity in your home → you’re now eligible to refinance!

3. Your Credit Score, GDS & TDS Matter

Refinancing is like applying for a loan all over again. Which is why lenders look at your credit score, GDS (Gross Debt Service) and TDS (Total Debt Service) to help them assess how much of a loan they are comfortable giving you.

What is GDS (Gross Debt Service)
The GDS (Gross Debt Service) is designed to determine if you can afford the mortgage payments based on your income. It combines your costs of shelter and divides that cost by your gross income (or you and your spouse’s income if you are applying for a mortgage refinance together).

The maximum ratio that is typical in the mortgage industry is 39%. This means that 39% of your gross income can be used for shelter.

Calculating Your GDS

Your GDS is calculated using the following formula:

GDS = [(PITH + ½ Condo Maintenance Fee*) / Gross Income] x 100

Your PITH includes principal, interest, property taxes, and property heat.

Let’s take a look at an example….

If you were looking to refinance a condo and paid $36,000 annually for your principal, interest, property taxes and property heat and made $120,000 annually your GDS ratio would be 30%

30% = [$33,400 + $2,600*) / $120,000] x 100

*if applicable

What is TDS (Total Debt Service)
Like the GDS the TDS (Total Debt Service) is designed to determine if you can afford the potential mortgage payment.

The industry standard TDS is 44%, but some lenders may make an exception.
The TDS has two main functions:
1. Pre-qualify the borrower by determining the maximum mortgage payment that the borrower can afford.
2. Verify that the payment qualified by determining if the potential mortgage payment falls within the lender’s TDS ratio.

Before we look at the formula and how this is calculated, it’s important to know what is and what is NOT included in your TDS ratio:

Included

Traditional Banks

Calculating Your TDS

Your TDS is calculated using the following formula:

Maximum Mortgage Payment = (Income x Max TDS [44%]/100) – (Property Taxes + Heat + ½ Condo Maintenance Fee + Other Debts)

[Remember: The industry standard TDS is 44%, but some lenders may make an exception]

Let’s take a look at an example….
Let’s say you own a condo unit up north valued at $200,000 that has an outstanding mortgage balance of $120,000. You want to refinance and want to know what you qualify for. Your monthly condo fee is $350, your property taxes are $1,900 and you have a monthly income of $5,000.

You also have a car payment of $310, credit card payments of $145 per month, a loan payment of $225 per month. Additionally, you make RRSP contributions of $50 per week, spend $185 for car insurance every month and your life insurance is $30 a month.

When calculating your GDS from these payments you would ONLY include your car payment, credit card payment, and loan payment. Payments you would NOT include are your weekly RRSP contribution, car insurance, and life insurance payments.

Maximum Mortgage Payment = (Income x Max TDS [44%]/100) – (Property Taxes* + Heat + ½ Condo Maintenance Fee + Other Debts)

MMP = ($5,000 x 44%/100) – ($1,900/12) – (0.50 x $350) – $100(heat) – $310 [other debt] – $145 [other debt] – $225 [other debt]

MMP = ($5,000 x0.44) – $158.33 – $175 – $100 – $310 – $145 – $225

MMP = $2,220 – $158.33 – $175 – $100 – $310 – $145 – $225

MMP = $1,086,67

Therefore, the maximum mortgage payment that you can qualify for is $1,086.67 per month.

4. Examine your credit before starting anything

Lenders want to see that their clients have experience using multiple sources of credit—from credit cards to car loans—in reliable ways. A credit score is based on credit history: overall debt levels, payment history, number of open credit accounts, and other factors. Lenders will use this information to evaluate that a homeowner will repay the mortgage loan in a timely manner, and plays a huge role in how much you could be approved for, and with which type of lender.

Anything 650 or above is considered a good credit score. But if your score is below 650, you will probably find it difficult to borrow money at favorable interest rates. It’s important to note that there are B lenders that lend with credit scores in the 500 range.

Get a free credit report with Equifax

It’s smart to check your credit score and pull your credit reports prior to starting the refinancing process. Addressing credit issues can help you raise your score and apply for a mortgage refinance.

5. Your Credit Score has an Impact on Your Rates

It’s not surprising that your interest rate is based on your credit score. Although there is no “magic number” to reach when it comes to receiving better mortgage rates, typically the higher your credit score, the lower the interest rates you will qualify for.  But it is important to note that there is a limit on how much it will improve the reduction. The rates of A-lenders are dependent on down payments and usually have a minimum credit score of 680 and their rates are not lower even if you have 800. 

Risk-Based Pricing
Mortgage lending is based largely on risk-based pricing. Meaning that lenders might increase the rate depending on every risk associated with your credit profile. With that in mind, If you have a low credit score, you may not be considered by certain lenders at all.

6. Estimate how Much Your Home is Worth

If you’re considering withdrawing a portion of your home, or tapping into your home’s equity, calculating how much your home is worth can better prepare you to do so. Lenders generally require you to maintain at least 20% equity in your property, and allow you to borrow up to 80% of your home’s value.

Let’s look at an example of how a cash out refinance works…

Say your home is now worth $600,000 and you still owe $100,000 on your home.  

In this case, you’d be able to withdraw up to $380,000 in cash while keeping at least $120,000 in your home after a cash-out refinance.

7. Gather Key Information from Your Lender

If the current conditions of your mortgage no longer meet your needs, you may decide to switch lenders. If you’re switching lenders, it’s important to gather key information from your current lender including your current term and interest rate, as well as possible penalties associated with breaking your mortgage. This way you’ll be able to compare your current lender’s terms to the new one, and see if it meets your financial goals.

Download a FREE Mortgage Lender Checklist

We’ve created a checklist to help you gather key information from your current lender.

A common decision for refinancing is to switch from a fixed-rate mortgage to a variable-rate mortgage. However, if you currently hold a variable-rate you cannot switch to a fixed rate.  But deciding whether you want to stay with a fixed-rate or switch to a variable rate is no easy task. In fact, many factors come into play when deciding between the two.

When choosing the one that is best for you consider the following…

A fixed rate is best for you if:

✔️ You enjoy the security of a rate that is guaranteed not to change for the term of the mortgage and are willing to pay a slightly higher interest rate for that security.

✔️ You prefer knowing mortgage payments and amortization that are guaranteed not to change during the term of your mortgage. 

A variable rate is best for you if:

✔️ You are comfortable with rate fluctuations to gain possible long term interest savings.

✔️ You expect that you may break your mortgage before the term ends.

Switching rates is a decision that will affect a homeowner for years to come. A mortgage agent can easily work with you to discuss what rate is best for you and your needs.

9. You Need to Prepare for a Home Appraisal

There are a few things you need to do before you get approved for a refinance. When you consider refinancing your mortgage, a lot will be based on the appraisal. An appraisal is conducted by a certified or licensed professional, and their job is to truly determine how much your home is worth by evaluating many factors. In the case of a refinance, the appraisal is protecting the lender by ensuring that it doesn’t lend the borrower/homeowners more money than what the property is really worth. 

The mortgage lender directly orders the appraisal. But there is no need to stress when preparing your home for an appraisal. CHS Realty Advisors have put together ten simple ways to be sure that you get the best appraisal possible so you can enjoy all of the hard work you’ve put into your home.

When mortgage rates are as low as they are today, refinancing becomes popular. But even when rates are low, refinancing your mortgage isn’t always the right choice, and is based on a case-by-case basis. 

Deciding when to refinance is no small financial decision, and just because other people you know are doing it doesn’t mean you should too. Talk to a mortgage agent, and they’ll be able to help you determine whether refinancing is a good decision.

It’s also worth having a solid grasp and evaluating whether you have the funds to pay the closing costs and fees associated with refinancing, including any penalties your original lender may charge. One may choose to refinance under two circumstances: at the end of your term and within your term.

The chart below outlines which fees are associated under each circumstance.

Mortgage Prepayment Penalty

If you’re refinancing within your term (breaking your contract before it’s up for a renewal), you’ll have to pay a mortgage prepayment penalty fee.

Mortgage Penalty Fee
If you’re switching lenders, you’ll need to pay a fee to discharge your mortgage from your current lender. Each lender has a different formula, therefore it’s difficult to calculate the penalty yourself and is best to contact your lender for this information. 

Mortgage Registration Fee
You must pay this fee regardless of whether you’re leaving or staying with your current lender. This process involves registering your old mortgage amount with your new one. This fee is governed by your provincial government and is typically $70-80. 

Legal Fees & Disbursements
It’s a lawyers job to facilitate the entire financial transaction between you and the lender, which is why you’ll need to consult with a real estate lawyer when you refinance your mortgage. Legal fees for a refinance typically range between $1,200 and $2,500.  

Appraisal Fee
A home appraisal is needed in order to determine how much the lender will let you borrow. An appraisal fee typically ranges between approximately $300 and $500, depending on the property.

12.  Make sure Your Taxes are up to Date

To successfully refinance your mortgage, you will have to prove your income by submitting copies of your income tax returns. Mortgage lenders will want to take a closer look at your financial situation before approving your loan. Your gross monthly income will be compared with your total monthly debts (DTI) to determine if you can afford your new mortgage payments. 

Most lenders will require two to three years of tax returns, depending on your employment status, to verify your income has been steady during the previous several years. With that said, homeowners with a steady income pose less of a threat than those whose yearly income varies.

Going through the Refi Process

13. How does it work? Where to get started

Considering refinancing is a new mortgage, you will need to shop around and reapply for a mortgage. Here is what you can expect:

14. Connect with a mortgage agent

You probably heard of the term “shop around to get the best mortgage” when you were first getting your mortgage. Well, the same thing applies when you want to refinance. Shopping around will help you get the best refinancing deal. A mortgage is a product, just like a car, so the price and terms may be negotiable. 

When you deal directly with a bank, they can only offer you products that they have. Similarly, when you deal with an Agent, they offer you the same products but from different institutions. At Only Simple, we have access to over 50+ lenders. Meaning we do the shopping for you, giving you more choices and more access. Which means only one application is needed to negotiate with all of the different lenders. 

That is to say, we aren’t limited to one lender and we take this opportunity to do what is best for our client. Giving you the best option that is right, for you.

15. Compare the different types of lenders

It’s essential to understand the different types of lenders that exist to fund mortgages in Canada – doing so will ensure you’re able to obtain the mortgage most suitable for your needs.

Let’s break down the different type of lenders and what you need to know:

When getting a mortgage, it’s important to pay close attention to the deal that the lender is providing you whether it’s an A lender, a B lender or a private lender.

16. Shop for your best rate and negotiate

The more mortgages you compare, the more likely it is that you get one that best suits your needs. To make the most of your mortgage shopping, you need to know what is most important to you and have questions prepared to clarify what different options are available. This step is crucial because it could save you thousands of dollars in the end.

Remember, no two mortgages are the same. Make sure you’ve considered all the mortgage features and lenders in your decision.

Download a FREE Refinancing Self Assessment

We put together a refinancing self assessment with questions you should ask yourself when shopping around for a rate.

17. Understand your new mortgage terms

Since you’ll be getting a new mortgage and changing the terms of the one you have on the home you have now, it’s important to make sure you understand your new terms.

18. Understand Your Penalty Fees

The costs of breaking your mortgage contract depends on the type of mortgage that you have. 

Before breaking your mortgage contract, find out if you must pay:

Cash back is an optional feature where your lenders give you a percentage of your mortgage amount in cash. You may also have to repay any cash back you received when you first got it. But this all depends on your lender. 

Learn about tips to reduce or avoid prepayment penalties.

19. Book and Complete Your Home Appraisal

Generally, there are three different parts of the appraisal process that homeowners can expect: 

1. Making an Appointment with the Appraiser
   You will receive a call from an appraisal expert after one or two business days once your lender has contacted an appraiser. You’ll be able to discuss a date and time to have your property inspected.
2. Inspection of Your Property
   An inspection should take approximately 30-minutes to complete. During this time, they will examine several key things in and around your property to get an estimation of the home’s value.
3. Completion of the Appraisal
   The appraisal expert will not be able to give you a complete report right after the inspection of your home and property is finished. First, they’ll need to take other factors into consideration, including the neighbourhood. Additionally, they’ll compare and contrast the value of your home against 3-4 other homes that have been sold in your area over the past few years, which will give an appraisal a more accurate assessment.After a few days the appraiser finishes their report and determines an appropriate market value, they’ll send it back to the lender. It is important to note that with the current market there is a significant backup in appraisals and you should try to book your home inspection as soon as possible to avoid delays in your mortgage refinance.

20. Work with a lawyer to finalize the paperwork and disbursements

A lawyer is one of the most important people you’ll work with during the refinancing process. Your lawyer is an independent advisor who will work to protect your interest and the lender during a mortgage refinance transaction. 

The Process

Mariann Karageorgievski, Lawyer at Polsinelli Law Professional Corporation, outlined what you should anticipate during a mortgage refinance process:

Once your lawyer contacts you, they will gather the necessary documentation and information required to satisfy the lender’s requirements in time for closing day. Typically you, as the borrower, may be expected to provide information relating to the property taxes, account numbers regarding existing mortgages or debts, and fire insurance. In the case that the lender requires the payout of additional debts (credit cards, car loans, ec), your lawyer will need information regarding those accounts.

Mortgage Refinancing Tip

Get your documents in order to assist in a smooth closing.

Your lawyer will review and execute all necessary information prior to closing day. This information varies depending on the particular lender but mortgage documents needed may include a commitment, disclosure statement, mortgage approval, etc. There will also be certain standard documents prepared by your lawyer that will need to be executed in conjunction with the lender’s documents in relation to the Family Law Act, Construction Act, possession of the home, etc.

Mortgage Refinancing Tip

If the property subject to the mortgage is your matrimonial home, do not be surprised when your lawyer requests that you also have your spouse attend the appointment to execute the mortgage as a consenting spouse.

How long will it take to close?

On average, Mariann says it will take approximately a week, give or take, to close the transaction from the time your lawyer recipes the mortgage instructions. However, the timing depends on several factors including urgency, complexity, lender requirements, other parties timing in relation to payouts, etc.

Their job is to ensure that the old mortgage(s) get paid off from the money included in the new mortgage, and he/she will ensure that the old mortgage(s) get discharged from the title of your property, once they have been paid off. Assuming your lender’s requirements have been met, on closing day your lawyer will receive funds into their trust account and will disburse funds in accordance with your mortgage instructions. The disbursements of funds may include the payout of listed debts or the payment towards the purchase of a property. The balance of funds may be then used to pay towards title insurance, legal fees, broker fee, etc. Finally, the net balance of funds, if any, will be made payable to you, the borrower. 

This is very important…

 It can create difficulties in the future if the old mortgage is not discharged properly. 

The cost of hiring a real estate lawyer

The legal fees depend on how complicated the purchase transaction is, as well as the lawyer’s expertise. According to Mariann “you can estimate approximately $1,250 plus HST and disbursements for a refinance.” But if you’re making a purchase during the refinance transaction, “then you should budget a bit more” says Mariann. 

To talk to Mariann, you may contact her via her westonlaw.ca/polsinelli-firm/ for more information regarding working with a lawyer during a mortgage refinance. 

Risks

Since consolidating debt allows you to pay off all your debts at the same time, it could also mean that the term of your mortgage will extend because you’re adding more debt into your mortgage. If you refinance your 30-year mortgage after five years to another 30-year mortgage, you’re eventually delaying your original payoff date. 

However, consolidating your debt gives you the opportunity to get a lower interest rate, making your debt more manageable and allows you to save what is in most cases a lot of money that would otherwise go into paying interest.

22. You’re not guaranteed to save money

Refinancing your mortgage isn’t necessarily a smart choice for every homeowner – it all depends on the situation. 

If you know you’re going to keep your mortgage for a while, you should consider the amount you might be able to save by refinancing as well as how much the process will cost you. Refinancing isn’t free; you will need to pay a breakage penalty, lawyer fees and appraisal fees. Although many homeowners bake these expenses into their new mortgage they are at the end of the day still additional fees that you have to pay whether that is upfront or as you pay your mortgage.

Refinancing is a great financial move when used carefully, as it can be a valuable tool for bringing debt under control. But before you refinance, it’s important to take a careful look at your financial situation and ask yourself: How much money will I save by refinancing? What are my financial goals?

23. You have to get requalified

Refinancing your mortgage requires a full application to be completed again, just like when you applied the first time around. 

The types of documents you will likely need to refinance include… 

1. Property tax statement
2. Most recent mortgage statement
3. Employment documentation will depend if you are employed or self employed.

Because the lender will look at your credit, this process has the potential to affect your credit score – at least temporarily. A hard inquiry on your credit is when lenders process your loan application which can lower your credit score by a handful of points. But not to panic, the score impact will (most likely) drop off completely after a year. 

24. Refinancing for the wrong reasons can be more harmful than good

Whether you’re considering refinancing due to unexpected life situations, to start a business, do home repairs or to pay off debt those are all good reasons to consider refinancing if the numbers make sense.

The Bottom Line

There’s no one-size-fits-all answer to whether refinancing your mortgage makes sense for you, it all depends on your situation. Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your mortgage, or helps you consolidate debt. But before you refinance, take a careful look at your financial situation, your goals, and what your payments could look like factoring in the associated closing costs of a refinance.  

If you do pursue a refi, talking to a mortgage agent is a great way to ensure you’re getting the best deal. You have worked hard for your money, and you owe it to yourself to see what your best option is.

Want to find out if you should consider refinancing your mortgage? Follow this journey, and find out.