While people are considering what to do with their debt payments during the COVID-19 pandemic, some experts are suggesting things they should keep in mind should there be a consideration to refinance their mortgage.
Rob McLister, a mortgage expert at Rates.ca, has offered three factors that people should remember if they decide to go down that path.
– Calculate your penalty: If you’re breaking an existing closed mortgage to refinance, you’ll pay a penalty. One in four who refinanced and/or broke their mortgage early paid a penalty of over $1,000. Many pay thousands more.
– Do the math: If you want to refinance into a cheaper rate, run the numbers by figuring out your remaining term, determining your interest savings by plugging your current rate and remaining term, determining the interest savings if applicable and subtracting your penalty and closing costs.
– Shop rates: Mortgage rates have climbed even though the Bank of Canada slashed its overnight rate by 1.5 percentage points in March. If it matches your risk tolerance and your finances are stable, consider a cheap, shorter term if you can find one.
Skott Enns, a mortgage broker with TMG The Mortgage Group in Regina, said they have had a number of clients contact them looking to refinance.
He said people need to make sure they have equity.
“In order to refinance, you need to have at least 20 per cent equity in your home. So that would require an appraisal to determine what the actual value is of your place,” stated Enns.
“If the equity exists, then we need to make sure the penalty for breaking the existing mortgage doesn’t chomp away at all the potential savings in your new mortgage.”
Enns added that it might be difficult for people who have a variable rate of 1.5 per cent to break their mortgage, saying those people will need equity to break that interest rate.
A recent survey from Rates.ca reports about 43 per cent of Canadians have previously had a five-year fixed and 47 per cent of them refinanced or terminated their mortgage early.