How to Change MortgagesJune 21, 2012
Since mortgages make up a large portion of the average Canadian’s monthly expense, it’s not surprising that many home owners look for ways to improve their mortgage terms and rates by switching mortgages, particularly when interest rates are low and looking to go higher. Depending on the circumstances, changing mortgages can save you money in interest charges, lower your mortgage payments, or allow you to pay off your mortgage more quickly.
There are several reasons why you may choose to refinance your mortgage; that is, essentially cancel your current mortgage in the middle of its term, and re-establish it with a different lender or with different terms.
Pros & Cons
Most people choose to change mortgages to get a lower mortgage rate, as this will allow them to save money over the term of the mortgage by paying less in interest. If you can switch to a mortgage that offers better terms, such as making additional payments towards your principal, then this may be another reason to change. Some lenders also offer incentives to switch your mortgage to their institution, such as favourable rates on other lending product or cash back. Plus, if you have a decent amount of equity in your home then refinancing may let you free up some capital to make other investments, pay down debt, or renovate your home to improve its value. All of these are reasons to consider refinancing.
However, be aware that there is always a downside to switching mortgages. For one, it does not reflect well on your financial stability if you are constantly refinancing your mortgage to remove equity. Nor will it help you in the long run if you take the equity and spend it on frivolous purchases, as you are simply extending how long it will take you to be mortgage-free. Don’t forget that there are also costs and potential penalties associated with refinancing that may cut into the savings you achieve.
Before committing to a mortgage change you need to calculate the costs involved and compare them against any savings achieved through a rate reduction (or other advantages such as freeing up equity or consolidating debt). Refinancing is much the same as taking out a new mortgage; you will likely need an appraisal of the property as well as paying legal fees for paperwork and filing. Talk to your lender about penalty fees, which is the cost associated with cancelling your existing mortgage. This fee can vary depending on the amount of your mortgage, the amount left in your term, and the difference between current interest rates and your original mortgage rate. A good rule of thumb is to calculate, at a minimum, three months of interest, although the penalty can run higher.
After you have run the calculations (hint: there are some very useful online calculators) and find that refinancing will provide you with an advantage, you can begin the process by contacting your new lender and a notary or lawyer to process the documentation. Enjoy your new mortgage!