Sep 5, 2023
Canada’s economy contracted in Q2, raising the odds of a BoC rate hold
This year has seen a rise in the number of homeowners who are considering refinancing their mortgage. Approximately 20% of Canadian homeowners say they plan to refinance their mortgage in the next 12 months, according to a recent poll.
What exactly is a mortgage refinance? Simply put, it’s the act of paying out your current mortgage and replacing it with a new one, with different terms and a new rate.
Here are two of the top reasons why people tend to refinance.
Reason #1: To Get a Lower Mortgage Rate
One big factor driving current borrowers to refinance is to take advantage of today’s historically low rates.
Consider this: A homebuyer in November 2018 secured a 5-year fixed rate at then-average rates of around 3.50%. Compare that to 5-year fixed rates refinance rates that are now around the 2% mark, and in certain cases even lower.
The potential savings of refinancing at a lower rate can be huge. For every $100,000 worth of mortgage, the difference between a rate of 3.50% and 2% is $76 a month, or more than $7,000 over a five-year term.
A downside, however, is that fixed rates come with a prepayment penalty. In some cases, particularly for borrowers who are breaking the mortgage early into a 3- or 5-year term, the resulting penalty could be high.
That’s not to say the math won’t work in your favour. You could still come out ahead over the long term, depending on your penalty and the new mortgage rate. It’s a calculation your mortgage professional can help with, and who will also show you the potential savings.
Reason #2: To Access Home Equity
Another reason refinancing has attracted additional attention in 2020 is due to the pandemic. In the survey cited above, 10.2% of respondents said they plan to refinance “due to COVID-19” now that they’re back to work.
Most Canadian lenders stepped up and offered mortgage payment deferrals of up to six months to clients financially impacted by the lockdown. Many of those deferrals have now ended, or are about to in the coming months.
Additional Reasons to Refinance
There are other reasons why homeowners might refinance as well, including:
No matter what your reason for considering a mortgage refinance, be aware of the potential hurdles, such as penalties or qualification criteria. If in doubt, consult a mortgage professional who can offer unbiased advice.