Most often people refinance for a few different reasons; monetary issues to consolidate debt, to have better household cash flow or to get a lower interest rate.
It doesn’t matter whether we are going through a recession or not, life happens to people and they need to get access to the equity that has built up in their home. Of the cases that I see, people are refinancing usually because of medical reasons, loss of one or both incomes in the household, decrease in one’s wage and household expenses become unmanageable and sometimes it is for investment purposes, such as maximizing one’s annual RRSP contribution.
The first thing you need to ask yourself is why you are refinancing. Can you afford your current debts, but you want to take advantage of the lower interest rate environment and consolidate all of your payments to get a lower one?
If you are refinancing because your spending habits got out of control, then it’s time to have a hard look in the mirror and ask yourself, how did I get into this mess and can I get myself out and stay out? That’s one of the benefits of owning a home, having the option to do so.
Let me caution you, once you’ve consolidated all your debts into one or two mortgages and lowered your payments by hundreds a month, don’t be rushing out to buy a car or a new computer just because you opened up some monthly payment room. Wait at least four to six months and see if your spending is under control. If you don’t and you get everything maxed out again, you may not have the option to refinance. The lenders only refinance your home equity to a certain level of the value of your home, so the option may not be available again. If consolidated properly, you shouldn’t have to call me unless it is to lower your rate as you’ve built up your equity again. I’ve had situations where I’ve been able to re-structure a client’s debt load and put $1,600/month back into the household cash flow, which meant that they could start saving again, instead of simply making interest payments.
Over the past couple of years our economy has been lucky to have the interest rates it’s had and many clients have benefitted from this new interest rate world. But there’s good news and bad news. When interest rates stay relatively flat, then paying out or breaking your mortgage is relatively cheap and you likely will only have to pay a three month interest penalty. When interest rates fall, then an Interest Rate Differential (IRD) comes into play, as mortgages generally have these two options -the lender charges whichever is higher. In today’s climate, I’ve seen many higher payout penalties. If you’ve been in your current mortgage for less than two to three years, than it may not be beneficial to pay out your mortgage, as the IRD may be too high.
Whatever your reasons to find out if refinancing is a viable option for you, call a mortgage professional to see if you can start saving money, as the big IRD penalties are dwindling as time is their biggest downfall and banks don’t like not having the upper hand.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres-Regional Mortgage Group and can be reached for appointments at 403-343-1125, texted to 403-391-2552 or emailed to jturcotte@regionalmortgage.ca
