“Mortgage Refinancing” refers to a transaction that substitutes an existing mortgage with a new loan before the original loan reaches maturity. The goal of refinancing is typically to save money by securing a better loan however there are many reasons for seeking refinancing that we will discuss throughout this blog. When deciding whether or not to pursue mortgage refinancing it is important to consider all costs and penalties within your calculations as they can have a significant impact toward your return on invested capital.
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Lower Rate Mortgage:
As interest rates for mortgages are all directly related to the key interest rate set by the Bank of Canada, there is a likelihood that during your loan there will be a change in interest rates. Refinancing is typically advantageous when interest rates drop as the rate you can expect to pay for your mortgage is lower than that of your current mortgage.
As the duration of your mortgage continues the amount of equity you have stored in your home may be very appealing to use as financing for other life ventures. A refinance of your current mortgage can allow you to take money out of your home and secure a new loan that can better fit your financial needs.
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Equity for Retirement
As your career comes to a happy close and the new adventure of retirement begins, using the equity built up in your home as retirement savings is an extremely popular and fruitful decision. Downsizing while using your home to finance the purchase of said new property allows the retiree to invest in their new home and use the difference as a pseudo pension. This strategy allows retirees to both utilize their home investment and continue to live a healthy and prosperous lifestyle.
By nature renovations are the act of improving your home to make it more livable. The impact renovations have on your investment return is largely dependent on how much the renovations contribute to the value of a home versus the cost to renovate. Renovations are an interesting investment activity as the benefit is very often, yet not always realized financially. Though renovations have the potential to make you money, sometimes the cost will be so high to pursue the project that the benefit is solely improving the livability of the property. Using equity built up within your home to finance renovations can be an extremely strategic move as it can increase the value of the home, meaning that your net return will increase in value.
If you are interested in starting your own business and/or moving your investment from real estate to another asset class, it is important to note that your risk of losing said money will increase and decrease depending on the asset you invest in. If you are using the capital invested in your principal residence to finance investing activities, though it may be a well thought out and sound decision, we recommend consulting a financial advisor before making any such decision.
Consolidate your debt
Let’s assume you have multiple debts (could include multiple mortgages on the same property) and want to combine some or all of your current loans to ensure you pay the lowest rate with the best conditions possible. This process is called debt consolidation and it can be a useful tool in ensuring your mortgage loan best fits your lifestyle needs.
An extremely under-utilized method of debt consolidation that we believe is a useful strategy for minimizing your total monthly payments is to use home equity to payoff your credit card or other high interest debts. Because your interest rate on your mortgage is likely the lowest of your debts, using some of the equity you have already built up to pay down costly debts can be improve your total living situation.
Whether it is due to interest rates, timing or other conditions that affect return on investment, there are always trade offs when pursuing mortgage refinancing. Because of the sheer power behind the tool of refinancing there are always multiple implications based on the decisions you make.
Refinancing Costs & Breakage penalties
If your mortgage has significant breakage penalties it may seem as though you are stuck between missing out on renegotiating for a lower rate or paying out a lump sum to the bank that renders the gains from renegotiating your mortgage relevant. One of the major deceptions that banks utilize when offering lower interest rate mortgages, is that in the long run, costly terms and conditions will ensure that no matter what, the bank will get paid. We at Blink Mortgage strongly believe in providing people mortgage solutions that do not compromise their lifestyles. Blink offers Freedom Mortgages, meaning we will eliminate your breakage penalty when renegotiating a better loan for you!
Withdrawing Equity Risk
As home equity is your invested stake within your home, taking money out of your home means that you are decreasing your investment. Because your home is likely your largest investment, this method of investing can reduce the total gains you receive upon selling your home as well as reduce your ability to borrow new money in the future.
When deciding whether refinancing is right for you there are two driving questions you need to answer:
How much will it cost me to refinance?
How much will I save by refinancing?
Typically a 1% savings in interest on a mortgage is good for refinancing given your terms and conditions are lenient enough that you are not compromising the money you save on your interest rate because of breakage penalties. Whether refinancing is right for you depends completely on your situation, and we at Blink Mortgage understand that this is not an easy choice. If you are considering refinancing please check out our refinance calculator to see how much we can save you.
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