When Should You Start Thinking About Refinancing Your Mortgage?

Owning a home gives you more freedom and flexibility—but it also comes with additional responsibilities and big decisions. One such decision is whether to refinance your mortgage.

Refinancing could save money and give you more flexibility if you own at least 20% equity in your property. However, jumping into a decision might mean you don’t fully understand the financial implications of your new deal. 

In this guide, we’ll reveal everything you need to know about refinancing your mortgage, including when it makes sense and how to find the best deal for your needs. 

Let’s jump straight in. 

How Does Mortgage Refinancing in Canada Work?

Refinancing a mortgage means switching from your current deal to a new one. You’ll use the new mortgage to repay your old loan and continue making property repayments. While some people refinance with their existing mortgage company, others might find a new provider. Working with an independent Victoria mortgage broker is one of the best ways to refinance your mortgage and ensure you’re getting the best rate possible. 

Mortgage refinancing is a popular way to access better deals, with many people searching for alternatives due to the Bank of Canada’s increasing interest rates (The Globe and Mail). 

The 2023 CMHC Consumer Mortgage Survey revealed that 24% of respondents refinanced their mortgage to consolidate debts, while 19% focused on home improvements. 

So, how does mortgage refinancing work? 

Assessing Your Eligibility

To refinance your mortgage, you must have at least 20% equity in your property. For example, if your home is worth $700,000, your equity should be at least $210,000. The provider will also check your home’s value and decide whether you can handle the repayments. 

We’ll cover the factors that might impact your application later, but understanding the basic criteria will help you decide whether it’s the right time to refinance. 

Evaluating Available Options 

Refinancing gives you more options, including the type of mortgage you choose and applicable terms. Should you go with a variable rate, or fixed rate? Fixed-rate mortgages offer more stability, while variable mortgages could offer lower rates when the Bank of Canada’s rates decrease. 

Some providers also offer flexible repayment terms, which typically range between 2 and 10 years, depending on your financial status. 

Wondering where mortgage rates in Canada are heading for the rest of 2024? We’ve provided an update on the 2024 mortgage rate forecast in Canada.

The Application Process

Once you decide on a lender, they’ll assess your eligibility and conduct a property valuation. Applications with a good credit score and a history of responsible borrowing might find the process less stressful as lenders view them as a safer choice. 

If everything goes to plan, you’ll receive a pre-approval agreement. When the paperwork is complete, the provider will release funds, and you’ll begin repaying your new mortgage. 

The Pros of Refinancing Your Mortgage

Refinancing is a big decision, but many find it offers them more flexibility and stabilizes their finances. There are numerous benefits associated with switching to a new deal, including: 

  1. Saving Money: If you find a mortgage provider offering lower rates, you can save a lot on your monthly repayments. First-time buyers can benefit from lower rates, as they’ve proven responsible during the initial mortgage agreement. 
  2. Income Boost: Securing lower repayments can free up cash and boost your monthly income. The extra cash can enhance your quality of life, from paying bills to having more money for day trips. 
  3. Debt Consolidation: If you take out a larger mortgage, you can use some of that money for debt consolidation. Clearing all outstanding credit and loan repayments will offer more financial freedom and increase your credit score. 
  4. Home Improvements: Lastly, refinancing your current mortgage can fund major renovations, including conversions and adding extra space to your property. These can increase your property’s value, providing a positive return on investment. 

Potential Drawbacks

As with anything, refinancing a mortgage also comes with some drawbacks. While they’re not necessarily deal breakers, understanding the negative side of switching mortgages can help you make the best decision for your needs. 

The potential drawbacks include: 

  1. Longer Repayments: A new mortgage could lock you into longer repayments. However, the mortgage duration might not be an issue if you have a stable income. 
  2. Associated Fees: If you switch to a new company, your existing mortgage provider might charge mortgage discharge fees. You should also consider legal and appraisal fees. 
  3. Higher Interest: Jumping into a decision might mean you miss out on savings. For example, your current deal could offer lower interest rates when you renew, but checking the terms of your mortgage can avoid this. 

Current Interest Rates in Canada

Mortgage interest rates depend on each provider and whether you choose a fixed rate or variable agreement. As of 2024, the average rates are as follows: 

  • Fixed Mortgages: Five-year fixed rates generally range between 5.25% and 5.60%, but they’re often lower if you have a larger down payment. It also depends on the company you choose and whether they feel you’re a responsible borrower. 
  • Variable Rates: These rates depend on the Bank of Canada’s base rate, which changes frequently. At present, variable interest falls between 5.95% and 6.95%. However, these rates aren’t guaranteed. 

The rates often change with the economy, leaving many wondering whether they could save or lose money on a variable mortgage. Our 2024 Canadian mortgage rate predictions guide can give you an idea of what might happen in the coming months. 

What Factors Impact Your Mortgage Refinancing Eligibility?

Aside from the equity in your property, there are other factors that might impact your eligibility to refinance a mortgage in Canada. Lenders take a risk when offering a mortgage, so they perform due diligence to ensure you’re a stable prospect. 

Here are the main factors to consider before applying for a new mortgage. 

Credit Score

Your credit score gives lenders a clear view of how you manage loans and credit cards. Canadian credit scores are measured on a points scale, with 300 being the lowest and 900 representing an excellent history (Government of Canada). 

Anything above 660 is considered good, meaning lenders are more likely to offer you a better deal. Individuals with a low credit score might find they’re offered shorter repayment terms and higher interest rates. 

If you can take steps to improve your score before refinancing, it will help you access better deals. 

Home Value

Lenders will also perform a home appraisal to assess the property’s current market value. Naturally, they prefer properties with a higher value because it might mean more equity – but this isn’t always the case. 

As your lender will repossess the home should you default on the loan, they’ll want to ensure it’s in good condition and in an area that doesn’t have excessive crime rates. Some lenders are more lenient than others. 

Income to Debt Ratio

Lenders also perform a comparison based on your current income and how many outgoings you have. For example, if someone brings in $6,000 monthly but has $4,000 worth of loan, mortgage and credit card repayments, they might struggle to find a lender. 

Having a high income with low debt obligations gives you access to better rates and repayment terms. 

Savings and Investments/Cash On Hand

While having savings and investments isn’t a defining factor of the application process, it can make a difference. If you have savings, it proves you’re responsible with money, leading lenders to look more favourably on your application. 

A savings account also means you can fund emergency home repairs and expenses, giving lenders peace of mind about your property’s ongoing value. 

Looking For The Best Mortgage Interest Rates in Victoria? Book Your Appointment

Refinancing your mortgage can improve your financial future and provide more stability. Whether you want to approach your current lender or find a new deal, lower rates and better repayment terms will make a significant difference in your life. 

Prime Mortgage Works is Victoria, BC’s top mortgage broker, providing clients with a streamlined application from the initial consultation to closing your deal. We’d love to help you access better interest rates through our network of mortgage providers. 

No matter your financial circumstances, our expert brokers can help, so please feel free to contact us today. 

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What are the alternatives to refinancing my mortgage?

Your lender might offer a blend and extend the agreement on your existing mortgage, enabling you to access different terms. Some people opt for a HELOC (Home Equity Line of Credit), typically up to 65% of the property’s value. 

These products offer a pre-agreed loan amount, and you can withdraw what you need throughout the duration. However, most HELOC interest rates cost more than refinancing the mortgage. 

How many times can I refinance? 

There’s no limit to mortgage refinancing, but the costs associated with moving to new deals repeatedly will add up. Remember, you’ll have to pay the appraisal, legal fees, and applicable charges to your current provider. 

Can I get a new mortgage with a bad credit score?

A low credit score doesn’t necessarily rule you out of refinancing but can impact your options. Some lenders will turn away anyone who doesn’t have a good score, while specialist mortgage companies might specifically cater to clients with poor credit histories. 

However, lenders typically introduce higher interest rates due to the additional risk they’re taking.