The ability to refinance your home with the bank is becoming more difficult. Most major lending institutions have adopted strict policies with respects to who they qualify for home refinancing.
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The past few years have seen a spike in the Canadian property market, with mortgage applications reaching record proportions.
Yet less reported is the growing trend of homeowners accessing the equity in their existing properties through refinancing.
With a national bank benchmark rate increase predicted, now may be the time to get equity from your home.
Many people are put off by refinancing due to its supposed complexity, but we can make it easy. Read on as we discuss everything you need to know about a home refinance in Canada.
Refinancing a house using traditional lenders is becoming tougher. There are now strict qualifying criteria put in place by banks that look at income, credit history, and job stability.
Even if you do qualify, you are usually restricted to lending 65% of the equity.
Luckily there are other options for a mortgage refinance, such as alternate lenders.
They often have more relaxed criteria, meaning you can leverage the value in your property even when turned away from these institutions.
A mortgage refinance works by paying off an old mortgage with a new one. It uses the value of your home against how much you have paid off your existing mortgage to release equity.
You then have better terms and can release cash.
To get a possible figure about how much value is in the property, start by determining how much your home is currently worth.
You can do this by looking at similar homes in the area and getting an approximate market value.
From this, calculate 80% of this value. This is the biggest amount you can aim at refinancing for, as this is the standard mortgage amount.
After this, calculate the outstanding balance left on your mortgage. Subtract this away from the 80% value of your home.
This is to account for the money you would need to pay off the existing mortgage.
Your remaining sum is the possible equity left in your home. This means you may be able to refinance for this amount.
If you are asking yourself “How do I refinance my home?” the process is actually easier than you think. Your first step is to break your mortgage contract early.
This is when you end your existing mortgage and take a new one with a different lender, the process of refinancing.
The next step can change depending on the new lender and conditions you choose. In a home refinance, a new mortgage gets created and pays the balance of the old one.
Some people may choose a similar method in which they go for a home equity loan or HELOC.
There are several reasons you may consider refinancing your home. Below, we outline why many people consider home financing as an option.
When you pay off a mortgage, you will have to pay a prepayment penalty. As a refinance is essentially a new mortgage, this is one fee you cannot avoid.
However, once you have done this, you can save money over time by getting a lower interest rate. This can be a variable or fixed rate.
Refinancing can get you up to 80% of the value of your home. Releasing this equity in your home can then be used for any projects or investments you may be considering.
One of the main reasons people choose to access equity in their homes is to consolidate debt.
The money gained can be used to pay off high-interest debts like credit cards and personal loans.
Just because you have bad credit, does not mean you don’t qualify for a home refinance. Even if you have been turned down by a bank, there are a number of other options.
This seems obvious, but many people neglect the impact just a small improvement to your credit rating can bring. Pay off debts, pay them on time, and reduce your debt to income ratio.
The more equity you have in the property, the more likely you will be to get accepted for a refinance.
Be patient and carry on paying off your current mortgage until more equity has been built.
Often referred to as B lenders, alternative lenders are organizations other than major banks that can provide you with loans and mortgages.
As many people no longer have the income and credit history to qualify for major bank loans, these are now a very popular alternative.
Primary and second mortgages, home equity loans, and refinance are usually services they can provide.
Most countries across the world offer government-backed loans, and Canada is no different. They require less money down and can be done with smaller values of home equity.
If you qualify for their requirements, they can offer some great advantages.
The qualification you need to refinance a home depends upon the lender. It will also depend upon the loan type and the amount you wish to have.
You can improve your chances of approval by making some adjustments to your current situation. Start by ensuring you have a good qualifying credit score.
Get your debt to income ratio as low as you possibly can.
After this, you just need enough equity in the home itself. If you don’t have it, then you may need to wait longer until this accumulates.
You should also have enough put aside to cover the costs of refinancing the home.
Refinancing your mortgage can take place at any time. It does not just have to be at the end of a term.
The only caveat is that you will be charged penalties for refinancing before the term is up.
You just need to work out if the money spent on penalties is worth the savings or payoff from the refinance.
If you are using it to consolidate debt, then it may be worth it, but if not, then wait until the end of the term.
There are no rules or laws in Canada regarding how many times you can refinance your home. Many people ask this question when refinancing for a second or third mortgage term.
In theory, as long as you fill the criteria for acceptance and have equity, you could refinance a home as many times as you like.
One alternative to a house refinance is a home equity loan.
The difference is that refinancing provides a new mortgage, which is used to pay off your old mortgage and often provides lower rates.
A home equity loan gives you money in exchange for the equity in your property.
Home equity loans are often referred to as second mortgages. You have a separate loan with its own payment dates and schedule.
Home equity from your primary mortgage is used as collateral, so if you default, the loan lender will stand to gain should foreclosure occur.
For this reason, you will find that home equity loans often have high-interest rates. However, they can still provide lower fixed interest rates than your previous mortgage.
Be aware that you are putting your primary residence up for collateral and you could stand to lose it.
Another alternative, similar to a loan, is a home equity line of credit (HELOC). This operates like a credit card that secures against the equity in the property.
You can borrow as little or as much as you like at any time.
Interest is only paid on what you have decided to borrow. Most HELOCs have a fixed interest rate, and you may pay a transaction fee when you use it.
When you refinance your mortgage, there are some costs you should consider.
These are on top of the mortgage penalty for paying early. Not all of these will apply to all lenders:
On average, this amounts to around 2% to 5% of the loan principal amount. For example, on a $300,000 property, you may pay between $6,000 and $15,000.
Now that you know how and why you should consider home refinance in Canada, work out the equity in your property.
Check a wide range of traditional and alternative lenders to see who can offer the best rates.
Even if you have great credit, work on improving it to increase your chances of application.
From here, you just need to decide on the best method of refinancing, and Turned Away should be your first stop.
We offer mortgage solutions and home refinance to those who have been turned down by banks.
Contact us here and make the first step to accessing the equity in your property.
We’ve helped a lot of people. See what they have to say!
We can’t thank you enough for all your help with our mortgage. We were skeptical about filling out an online application but we had tried several banks and due to our credit, couldn’t find anyone to help us. Getting a call within 15 minutes of submitting our application to go over the application put my mind at ease but my husband and I were both shocked to receive a call the same day with an approval. We are still amazed at everything you did considering how difficult the banks made our situation sound. Again, from the bottom of our hearts thank you so much!
Marilyn & Bob T, Whitby Ontario