Refinancing a Mortgage

Refinancing a mortgage is a common dilemma for Canadians.  The concept of refinancing a mortgage becomes more popular when mortgage interest rates decline.  Refinancing is done in the majority of reasons for one main reason—to save money and reduce mortgage payments or increase the amount that is applied towards principal. 

Individuals refinance and save money in a variety of cases.  Refinancing makes sense if a borrower is obtaining a lower mortgage interest rate than an existing one.  It is also appealing in certain cases, if the existing mortgage product has limited flexibility such as no prepayment privileges or no lump sum payments;   or  if borrowers have other debt such as costly high interest credit cards.  Consolidation of existing debt can save borrowers significant sums of money.  However, refinancing often comes with a fee. 

Most lenders will charge a penalty if a borrower is refinancing prior to the maturity of the mortgage.  Penalties can be significant, and in some cases the penalty far outweighs the financial benefits of consolidating other debt.  Lenders often calculate the penalty based on the higher of two calculations.  Lenders can use a standard three months interest penalty or a second one termed an Interest Rate Differential (IRD) penalty.  The way in which these calculations are made, and how they work are clearly disclosed in the mortgage agreement between the lender and borrower.  Refinancing existing non-conventional mortgages has limits and restrictions; borrowers are only allowed to refinance and borrow up to 80% of the value of the property.

Consider Refinancing for the following circumstances:

  • Interest rates are low
  • If you are looking for a more flexible mortgage product
  • If you want to extend your amortization period
  • If you carry high interest debts such as credit cards If you are considering purchasing an investment property and need access to capital
  • If the associated savings in the interest rate reduction outweighs the penalty often imposed by the lender
  • If you are looking to fund an extensive renovation

Refinancing a residential mortgage to help finance the purchase of an investment property or other types of investments has the potential to convert some of the interest on the refinanced mortgage into tax deductible interest.  Certain conditions and restrictions do exist and individuals should consult with professional tax advisors. 

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April 27, 2017

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