What is mortgage refinancing?
Mortgage refinancing allows you to borrow money against the equity in your home. Equity, or net value, is the difference between your home’s current value and the balance remaining on your mortgage.
Good to know : You may hear people talking about
“remortgaging” or “refinancing.” Both of these expressions mean the
same thing.
Here’s an example: Let’s say that your home is worth $300,000, and you still have $150,000 left to pay on your mortgage. By remortgaging, you could borrow $90,000: ($300,000 x 80%) – $150,000 = $90,000
Important: As this example shows, you can refinance up to 80% of the value of your home, minus the balance of your existing mortgage. You would then owe $240,000, which is the balance of your current mortgage ($150,000) plus the new amount borrowed ($90,000).
How will refinancing affect my mortgage payments?
Refinancing doesn’t impact the repayment of your existing mortgage. You can simply add a new mortgage portion for the new amount borrowed.
When can I refinance my home?
You can refinance at any time, provided that you meet certain criteria. You don’t need to wait until it’s time to renew your mortgage at the end of your term.
Is refinancing my home a good option for the following projects?
Refinancing for home renovations
You could refinance your home to unlock the money you need to carry out your renovations. Good news: The interest rates for mortgages are often lower than for other types of loans.
You can access funds to invest in your home without having to withdraw money from income-generating investments.
If you need access to funds for occasional needs, a home equity line of credit (HELOC) is another option that might interest you. You can dip into it when you need to and only pay interest on the funds you borrow. This may be a good solution for lengthy renovations or other projects where payments are spread over a longer period.
Good to know: There are some tax credits that can help you with renovations. There are also some grants for renovations to make your home more energy efficient.
Are you thinking about renovating your home? Read our article for help planning the whole process:
→ “How to make a home renovation budget”
Refinancing to buy a second home
You can refinance your current mortgage to purchase a second property. Talk it over with your advisor to find out if this option is right for you. Your advisor will help you to answer the following questions:
- How much can you borrow?
- How much will your mortgage payments be?
- Can you afford the fees associated with buying another home as well as the ongoing costs of running two homes?
Refinancing to pay off debt
It’s possible to refinance your mortgage to consolidate high-interest debts. This can save you money on interest or allow you to reduce your monthly payments by extending your repayment period. Your advisor can offer you support with debt repayment and help you work towards better financial health.
Refinancing to invest
You can also refinance your home and use the money to invest. This can be a good strategy if you want to take advantage of an investment opportunity or purchase a rental property.
Careful! Be sure to weigh up the cost of the additional borrowing against the potential return on your investment. Talk to your advisor or financial planner about the pros and cons to ensure you fully understand this strategy.
Refinancing to contribute to an RRSP
If you’re nearing retirement and you have unused contribution room, refinancing your home to make a contribution to your RRSP could be a good option for you. You can use the borrowed funds to maximize your savings so that you can look forward to a more comfortable retirement while reducing your taxable income today.
Because this all depends on your overall financial situation, it’s a good idea to weigh up your options with a specialist advisor.
Do you have enough money put aside for retirement?
Check out our article:
→ “How much should you save for your retirement?”
Refinancing to have additional income in retirement
Refinancing allows you to unlock the equity in your home so that you can access liquidity on a recurring or occasional basis during your retirement.
Keep in mind, though, that there are other options for maximizing your income and reducing your tax burden in retirement that don’t involve refinancing your home. It’s very important to draw up a retirement plan and explore all the options open to you.
A reverse mortgage (external link) is another financing option you might consider if you’re aged 55 or over. You can borrow up to 55% of the current value of your home, and you don’t need to make any payments before the loan is due. You will only have to repay the loan when your home is sold, you move out, or the main borrower dies. However, interest will continue to accrue on the balance owing. A reverse mortgage may also be a less attractive option if you want to leave your property as an inheritance.
Refinancing to start or grow a business
It can sometimes be difficult for business owners to obtain financing. That can make mortgage refinancing an attractive source of capital for those looking to start a business or invest in their company’s development.
It’s important to remember that, by refinancing your home, you’re taking on a debt that will need to be repaid. Talk to a specialized business advisor about all the financing options available to help you start your business, such as private investors.
Depending on your needs and financial situation, mortgage refinancing may be a good option for you. For help choosing the strategy that’s best for you and making your dreams a reality, speak with your advisor. We’re here to answer your questions.