About one in six people with mortgages will refinance this year. And too many will pick the wrong financing.
That's a problem. Refinancings aren't cheap and they often involve penalties, so folks need to choose the right mortgage from the get-go.
To assist with that task, I've quizzed a crew of mortgage advisers, asking for their best recommendations. If you're contemplating a refinance, these tips could save you some bucks.
Meet the pros
Our mortgage experts are back, including:
- Shelley Jobb, a mortgage adviser of 17 years with CIBC;
- Sarah Taylor, a top mortgage specialist at Meridian Credit Union;
- Dustan Woodhouse, one of Canada’s 20 leading brokers, according to the Canadian Mortgage Professional magazine.
The scenario: Refinancing for renovations
Picture a 45-year old couple with two young kids and no more planned. The husband has provable self-employed income for the past three years. The wife is a stay-at-home mom. They've got $100,000 in savings, an average debt load, great credit and they can handle higher interest rates. There's 15 years left on their mortgage and they want to refinance their suburban home for $75,000 in renovations. Mortgage balance before refinance: $600,000. Home value: $1-million.
What mortgage term would you recommend?
Shelley Jobb: "I'd suggest a hybrid – part mortgage, part line of credit. Set the mortgage to $675,000 and put the remaining [equity] in a line of credit so they have … a buffer. What happens with renovations is that homeowners underestimate costs and there are overruns.
These borrowers have more of a fallback. … They should more likely look at a variable rate, which has shown to be more cost effective over time. … They have room on their debt service [ratios] so they wouldn't be as impacted if there was a payment fluctuation."
Sarah Taylor: "I would recommend a variable closed rate. … With a variable-rate mortgage [borrowers can] take advantage of one of the lowest interest rates available. Payments [can be set] above the contracted interest rate to ensure that their amortization is not extended beyond the contracted amortization."
Tip: With a variable-rate mortgage, payments usually don't change when prime rate changes. With an adjustable-rate mortgage, the payments change every time prime rate changes.
Dustan Woodhouse: "When you own a business it's a roller-coaster ride. We would look at a home equity line of credit (HELOC) product … a 'collateral charge.'"
Tip: A collateral charge lets you draw funds later with no legal fees – very useful for entrepreneurs. But it also costs up to $1,200 more than a "standard charge" (i.e., a regular mortgage) when switching lenders.
In terms of rate type, "at 45 years old … we need to be ready for anything that comes at us. … Life is variable, and so your mortgage should be too."
What amortization would you recommend?
SJ: "They have 15 years left but … we could even go to a 30-year amortization if it made a difference in them qualifying [for example, helped reduce their debt service ratio so it fit lender guidelines] … but if they don't need a longer amortization, I'd make it 25 years."
Tip: Some lenders let you increase your payment 100 per cent (or "double-up payments") to reduce your amortization faster. Examples include Alterna Savings, CIBC, Coast Capital, Desjardins, First National, London Life, National Bank, RBC, Scotiabank and TD Canada Trust.
DW: "[I'd suggest taking the] amortization back out to 30 years on paper, just to give you the option of a low payment should you need it (such as if your business slows). [Then] take advantage of the lender's prepayment privileges and set up a monthly automated lump-sum prepayment, which can put the effective amortization back to 15 years."
What mortgage features would you recommend?
SJ: "A collateral charge gives them the option of having more funds for renovations in the future." It's also useful for purchasing a vacation or investment property, and "if the business experiences a slowdown, they can reborrow from their line of credit to get them through, if needed."
That said, "if they switch lenders every five years then a collateral charge might not be the best product. … In that case, go with a variable mortgage and take the maximum amount for renovations. … They can [then] make a prepayment if they don't use the extra borrowing."
ST: "A great majority of homeowners move or require changes to their mortgage within their term. Ask what options the lender offers when you want to take out equity (Is there an ability to refinance?), move to a new property (Is it possible to port and blend your rate?) and take advantage of a new lower interest rate if available (Are there early renewal options?)."
Tip: Porting means moving your mortgage to a new property without penalty. Blending a rate means adding new money to your mortgage at current rates but keeping your existing rate on the old money.
What's the No. 1 mortgage mistake refinancers make?
DW: "The No. 1 mistake such clients make is not planning for the future and the bad that might come. [Thus the importance of] taking the maximum amortization to have a low payment option … or, not planning for the good that might come. [Hence the importance of] pushing the HELOC approval to the maximum amount so that funds are available for investment – not spending, investment."
ST: "With a variable-rate mortgage it's important to keep an eye on the market and prime rate trends. Not locking it in due to not tracking market conditions [is a common problem]. Most financial institutions will not contact mortgage holders when rates are increasing. It's up to the homeowner … to lock in the rate if the time arises."
Tip: If your mortgage rate floats with the prime rate, lenders virtually always let you lock into a fixed rate, at your option. But many make you convert into a three-year term or longer if you do.