A Guide to Refinancing Your Mortgage in 2024
Interest rates have hit a 15-year high and those refinancing may be feeling a level of stress and
uncertainty of what to expect. With economic conditions ever-fluctuating, understanding the
process of refinancing a mortgage can help ensure you get the best deal on your home loan for
your financial situation. From first steps to potential risks, this is what homeowners need to
know before refinancing. The experts at Zoocasa weigh in:
Understanding the Current Mortgage Outlook
The decision to refinance a mortgage, that is breaking and replacing an existing mortgage
agreement, is something many homeowners consider when they want to secure a lower
monthly payment or are cash-strapped and would like to use the equity they’ve built in their
home. Refinancing may also be a good idea for homeowners who want to shorten or lengthen
their mortgage terms.
For example, it is becoming more common for banks to offer 30-year amortization periods.
If you switch from a 25-year to a 30-year loan term, your monthly payments will go down,
helping to ease the financial strain of previous high payments. On the other hand, shortening
your mortgage term will mean higher monthly payments but you will pay less interest overall and
will own your home sooner.
The 5-year fixed mortgage rate was 5.49% at the end of September 2023 - one of the highest
rates seen since the 2008 financial crisis. But this doesn’t mean homeowners can’t benefit from
refinancing now. If you currently have a variable-rate mortgage, switching to a more stable
fixed-rate mortgage could save you money in the long term. This can be a strategic move,
especially when variable rates may stay elevated for a period of time.
Passing the Stress Test
Before obtaining a new mortgage, Canadians must pass the stress test. Unless you are
renewing your mortgage with your current lender, you will have to pass the stress test which is a
financial assessment that proves you can afford to make mortgage payments at a higher
interest rate than the one you are applying for. The stress test will look at your income, debt,
household costs, and other financial factors to determine whether you pass or not. To prepare
for the stress test, homeowners should reduce the amount of debt they have as much as
possible and if necessary, get someone to co-sign on your mortgage.
The Risks, Rewards, and Costs
If you are breaking your mortgage contract, you’ll have to pay penalty fees. The exact amount
you have to pay depends on the type of mortgage or lender you have and can be anywhere
from a few hundred dollars to a few thousand. These costs can add up quickly so it's essential
to weigh the potential benefits and risks of refinancing before making any final decisions.
Another risk you’ll want to consider before committing to refinancing is that you don’t put
yourself at risk of overborrowing. Overborrowing occurs when you take out more funds than
necessary, leading to an increase in your overall debt load. If the funds obtained through
refinancing are not used wisely, it can lead to financial stress and challenges in meeting
repayment obligations.
However, with enough planning and research, refinancing your mortgage can be a useful
financial move. The equity you built in your home can be used to pay for improvements or
upgrades within your space that will in effect further increase the value of your home.
Alternatively, you can access the equity built in your home to consolidate debt, plan for
retirement, or make other large purchases.
Regardless of the reason, refinancing your mortgage can be a valuable tool to save money on
monthly payments or access equity in your home. Remember to speak with a mortgage broker
or financial advisor to help you navigate the options and find the best solution for your individual
needs.
