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Mortgages

Why refinancing your mortgage may not make sense Add to ...

After a brief swing upwards in borrowing costs in recent months, Canada's big banks are once again touting some of the lowest fixed-rate mortgages they have in years and prompting some to consider refinancing their loans.

But experts say that trying to take advantage of the lower rates, if you are still years away from renewing your mortgage, can come at a cost.

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That's not to say it might not be worth your while if you are consolidating other higher-interest debt, such as credit cards, or planning to use the money to pay for renovations. But you just might not save as much as you think.

Laura Parsons, a mortgage expert at the Bank of Montreal, said borrowers need to take a look at their borrowing needs as a whole, not just their mortgage.

She noted that mortgage rates are likely the cheapest way to borrow money, but may not be the best option.

"In some cases, a rate might be lower than most, but it won't have the flexibility you need," she said.

"It is bigger than just deciding you're going to refinance. It is really taking a complete checkup on your current finances and understanding what rates you have out there."

While variable-rate mortgages are influenced by a bank's prime rate and in turn the Bank of Canada's key rate, fixed-rate mortgages are affected by the bond market. So while the central bank raised rates through the summer and with them variable-rate mortgages, bond yields were slipping and with them fixed-rate mortgages.

So while the rates for lines of credit, which are often tied to the prime rate, have climbed, the cost of fixed-rate mortgages has dropped.

The penalty banks charge for breaking and refinancing a mortgage depends on the size of a mortgage and the number of years left remaining on it, and could cost tens of thousands of dollars.

The prepayment charge is most commonly either three months interest on your outstanding mortgage balance, or the interest rate differential, whichever is higher.

The interest rate differential is the difference in the interest payable on your existing mortgage versus that payable on a replacement mortgage.

In addition to the prepayment penalty charged by the bank, you will also have to pay the legal fees associated with a new mortgage.

And if the new mortgage is for more than 80 per cent of the value of the home, CMHC fees related to the mortgage will also be incurred.

"Right now because of the huge difference and how much interest rates have dropped, interest differential most of the time is the issue," said Bill McFarlane of the Royal Bank in Calgary.

Mr. McFarlane noted that if saving money on your mortgage is the goal, making extra payments is likely easier than refinancing.

But if a homeowner needs to access some of the equity in their home, Mr. McFarlane said there are options in addition to refinancing, including a home equity line of credit.

"If I have a lot of equity in my home, that's another excellent way of doing it without even touching the existing mortgage I've got right now," he said.

Jim Smith of Scotiabank said while many people may not save money by refinancing instead of taking a home equity line of credit, they may improve their cash flow, meaning they will lower their monthly payments.

"From a cash flow standpoint, it will probably cost them more per month," Mr. Smith said of a home equity line of credit.

"It saves them money in the long term on how much interest they pay, but it does reach into their pocket for more and so in a lot of cases, people can't reach into their pocket that much and at that point they do need to refinance."

Have a question about mortgages? Wondering whether you should refinance or lock in your rate? On Monday, Nov. 22 at 1 p.m. (ET), BMO mortgage expert Laura Parsons will answer your questions. You can set an e-mail reminder for yourself in the box below. Mobile users can join the chat by clicking here.



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