How does Home Refinancing work in Canada?
Refinancing a home can be a wise financial decision, especially when interest rates are low, and your credit score is high. In Canada, the process of refinancing a home is similar to that in the US, but there are some key differences that are worth noting.
Buying a home takes a lot of time and documentation, so you’re probably not excited about the prospect of cancelling your current mortgage and applying for a new one.
When you add up the dollar figures, refinancing could save you hundreds of dollars per month or unlock thousands of dollars in cash — and there may never be a better time to do it.Here’s a quick overview on refinancing in Canada, including how it works, who should refinance, and how to save the most money.
In this blog, we will cover the basics of home refinancing in Canada, including what it is, how it works, and what factors to consider before refinancing.
What is Home Refinancing?
Home refinancing is the process of replacing your existing mortgage with a new one, often with a lower interest rate, different repayment terms, or both. The new mortgage can be from the same lender or a different one, and can be used to pay off the existing mortgage.
There are numerous ways for you to refinance your home, and there are clearly several economic advantages to doing so at the right time. However, there are several factors to consider and steps to take before you can successfully access your home’s equity and secure another loan with better terms.
There are a few reasons why homeowners may choose to refinance their homes, including:
- To take advantage of lower interest rates and save money on monthly mortgage payments
- To switch from an adjustable-rate mortgage to a fixed-rate mortgage or vice versa
- To access the equity in their home and use the funds for other expenses, such as home renovations or debt consolidation
- To pay off their mortgage faster by shortening the loan term and making higher monthly payments.
How Does Home Refinancing Work in Canada?
The process of refinancing a home in Canada is similar to that in the US, with a few key differences.
Here are the basic steps involved in home refinancing in Canada:
Determine your home equity and credit score:
Before you can refinance your home, you need to know how much equity you have in your home and your credit score. The amount of equity you have is the difference between the value of your home and the amount you owe on your mortgage. Your credit score is a numerical representation of your creditworthiness and can impact the interest rate you qualify for.
Shop around for a new mortgage:
Once you know your home equity and credit score, you can start shopping around for a new mortgage. You can apply for a mortgage from a different lender or negotiate a new mortgage with your existing lender. It’s important to compare the interest rates, repayment terms, and fees of different mortgages to find the best deal.
Get approved for the new mortgage:
Once you’ve found a mortgage that you’re interested in, you’ll need to apply and get approved for the new mortgage. This process involves submitting an application and supporting documentation, such as pay stubs, tax returns, and bank statements.
Close on the new mortgage:
Once you’ve been approved for the new mortgage, you’ll need to close on the mortgage by signing the necessary paperwork and paying any fees or closing costs. The new mortgage will pay off your existing mortgage, and you’ll start making payments on the new mortgage according to the new terms.
Refinancing a home requires you to have enough equity in your home to cover the new mortgage. In Canada, you generally need to have at least 20% equity to avoid paying for mortgage insurance. If you don’t have enough equity, you may need to pay private mortgage insurance (PMI), which can increase your monthly payments. Additionally, if you’ve recently purchased your home and haven’t had time to build up equity, refinancing may not be the best option for you.
Your credit score can impact the interest rate you qualify for, so it’s important to make sure your credit is in good shape before applying for a new mortgage. In Canada, the minimum credit score required to qualify for a mortgage is usually around 620, but a higher score can help you qualify for a lower interest rate. Check your credit report for errors and work to improve your credit score before applying for a new mortgage.
When refinancing a home, you’ll have the opportunity to change the repayment terms of your mortgage. For example, you may be able to shorten the loan term and make higher monthly payments, or you may be able to extend the loan term and make lower monthly payments. Consider what repayment terms work best for your financial situation and goals.
Your future plans:
Refinancing a home can be a long-term commitment, so it’s important to consider your future plans before making a decision. For example, if you’re planning to sell your home in the near future, refinancing may not be the best option. On the other hand, if you plan to stay in your home for the long term, refinancing can be a smart way to save money and build equity over time.
In conclusion, home refinancing in Canada can be a smart financial decision that can help you save money and build equity in your home. However, before making the decision to refinance, it’s important to consider a variety of factors, including interest rates, fees and closing costs, home equity, credit score, repayment terms, your future plans, and market conditions.
If you’re considering refinancing your home, take the time to do your research, crunch the numbers, and consult with a trusted professional to ensure you make the best decision for your unique financial situation.