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Mortgage Refinance
Refinancing can be a beneficial move if it’s timed well and done carefully. It pays — quite literally — to know all you can about the process before deciding whether a mortgage refinance is right for you.
The process is quite similar to getting a new purchase mortgage, only there won’t be a new house to move into.
How a mortgage refinance works in B.C.
To refinance your B.C mortgage, you’ll use a new mortgage to pay off your current mortgage. You can choose to refinance with the same lender, or use the opportunity to shop for a new lender.
When refinancing, you may have the option to borrow more money than you need — resulting in a new mortgage with a higher balance than your old one. These extra funds can be paid out as cash that can be used to finance home improvements or pay down high-interest debt, for example.
Unlike some instances of renewing a mortgage in B.C., refinancing requires you to requalify for a new one. To be approved, you’ll need to provide the following:
- Personal information, such as your identification and social insurance number.
- A letter of employment and/or proof of income.
- Tax documents, such as your notice of assessment from the last few years.
- Financial details, including any existing debt and assets.
- Recent statements from your bank account and investments.
Besides these details, your new lender will also want to look into a few additional things:
- Home value. An appraisal will be ordered to determine the current value of your home. The homeowner usually bears the cost.
- Debt service ratios. The lender will want to ensure that you fall under the recommended gross debt service (GDS) and total debt service (TDS) ratios.
- Credit score. An updated credit check will likely be performed to see how your credit score and history look.
- Mortgage stress test. To be approved for a mortgage with a federally regulated lender, you must pass the stress test to ensure you can afford the new contract terms.
How much can you borrow by refinancing in B.C.?
Although you can borrow up to 80% of the appraised value of your property, you need to subtract the balance of your mortgage and any outstanding loans against your home.
For example, Let’s say your home has an appraised value of $650,000. You could borrow $520,000 since that’s 80% of the value. However, if the mortgage remaining on your property is $400,000, you could only access $120,000 of your equity.
When to refinance your mortgage
Although you can refinance your home whenever you want, there are a few occasions when the timing may be ideal.
- Interest rates have dropped. Even when factoring in fees, refinancing could save you money in the long run if mortgage rates have dropped significantly.
- When your mortgage is near your renewal date. Refinancing near the end of your current mortgage term is a good strategy since the prepayment fee may be lower.
- You want to invest. Funds from refinancing could be used for home renovations or buying an investment property.
- You want to reduce your debt. Anyone with high-interest debt, such as credit card debt or an auto loan, could consider refinancing to take advantage of lower rates.
FAQs
Questions
you may have!
What are the rules to refinance a mortgage in B.C.?
You can only refinance for up to 80% of the appraised value of your home. Since this would be considered a new mortgage, lenders will want to verify things, such as:
- Your income and employment.
- Credit score.
- Debt service ratios.
- That you can pass the mortgage stress test.
Does refinancing hurt your credit?
When reviewing your refinancing application, B.C. lenders will conduct a hard inquiry on your credit report. That will usually result in a slight but temporary drop in your credit score. If you choose to borrow more than your current mortgage balance, it will increase your credit utilization ratio, which may also have a negative effect on your credit score.
Can you refinance a mortgage multiple times?
There are no limits on the number of times you can refinance a mortgage in Canada. But each refinance, depending on when you apply, could cost you in administration fees or penalties. And if your amortization period gets extended with each refi, you could be paying additional interest for years.
Will refinancing a mortgage affect my credit?
A mortgage refinance can negatively impact your credit. By closing your previous mortgage and replacing it with a new one, you may reduce the overall length of your credit history, which can impact your credit score. Any hard inquiries into your credit report made during the refinancing process can also temporarily lower your credit score.
What is a mortgage stress test?
The mortgage stress test is a model used to verify whether a borrower can afford the mortgage if rates went up or if they experienced some sort of financial turmoil. To pass the mortgage stress test, borrowers must be able to qualify for their mortgage at a rate of 5.25% or at their contracted mortgage rate plus 2%.