Should you refinance your mortgage in 2021?

*Rates are based on historical discounted 5-year mortgage rates.
When I explored refinancing my mortgage, I found that I could lower my interest rate from 2.29% to 1.84%. This drop would lower my monthly payment by $174 per month – that number got my attention!

2. Accessing equity

One of the most significant benefits of refinancing your mortgage is to access the equity in your home. Your home equity is your home’s value minus your mortgage’s balance. This equity is available for you to withdraw and use in many different ways, including:

1. Pay off high-interest debt
2. Home renovations
3. Post-secondary education
4. Purchasing an investment property

You can access up to 80% of your home equity by increasing your mortgage value when you refinance. To determine how much equity you can access, you can use Ratehub.ca’s refinance calculator, or we’ve broken down the formula below.

The accessible equity in your home is 80% of the home’s value, less the current mortgage amount. So if your home is worth $500,000, and your current mortgage amount is $250,000, the calculation is:

In my case, I added $5,000 to my mortgage amount to cover the fees associated with refinancing (more on that below).

3. Stability

Finally, let’s not forget the fact that we’re in a global pandemic, and refinancing your mortgage means you have the chance to lock in your mortgage interest rate for up to five years. That guarantee of a lower interest rate for such a long period can take some pressure off your finances, help you put away extra cash for emergencies, and provide stability in a world where even basic securities can seem unreliable.

Downsides of refinancing your mortgage

Of course, refinancing your mortgage isn’t all upside. There are fees and penalties to consider before taking the plunge with refinancing.

1. Prepayment penalties

When you refinance your mortgage, you break your existing mortgage agreement and apply for a new one. Breaking your mortgage results in a prepayment penalty charged by your bank. The prepayment penalty is calculated as either the three months’ interest or the interest rate differential (IRD), whichever is greater. To find out your prepayment penalty, use the Ratehub.ca Penalty Calculator, or call your lender and ask. Prepayment penalties can be quite significant, ranging from several thousand to tens of thousands of dollars, so it is essential to have this information to decide whether refinancing is worthwhile.

In my case, my mortgage was up for renewal in about eight months. My mortgage is on the smaller side (around $220,000), so the prepayment penalty was around $1,200 – a reasonable amount for this refinance.

2. Extra costs

On top of your prepayment penalty, there are other costs associated with refinancing your mortgage. Here’s a breakdown of the fees you may pay:

1. Mortgage discharge fee ($200-$350)
2. Mortgage registration fee ($70)
3. Legal fees ($700 – $1,000)

While none of these fees are excessive, they must be paid upfront and can catch you by surprise if you aren’t prepared for them. In my case, the extra $5,000 I added to my mortgage amount more than covered the fees I incurred.

3. Qualification problems

Finally, 2020 was a turbulent year, and if you experienced financial upheaval, you aren’t alone. Refinancing your home involves applying for an entirely new mortgage, which means you’ll need to prove you can afford your monthly mortgage payments. Your lender will use your credit score, income, and debt information to determine whether you qualify for your mortgage amount. Requiring this information means that if you’ve recently become unemployed, taken on new debt, or missed payment resulting in a lowered credit score, you may not be able to qualify for a new mortgage at this time.

Pros and Cons of refinancing your mortgage

Here are a few things to consider when you’re thinking about refinancing your mortgage.

Pros

1. Save money by lowering your monthly payment and reducing the total interest paid
2. Ability to access up to 80% of the equity in your home for debt consolidation, renovations, and more
3. Add stability to your budget by locking in an ultra-low mortgage rate

Cons

1. Prepayment penalties can cost thousands of dollars
2. Extra fees
3. Possibly difficulties qualifying due to unemployment or debt

The bottom line

The global pandemic in 2020 led to some genuinely unique economic conditions and some of the lowest mortgage rates on record. Yes, the pandemic was extremely hard on many Canadians, but if you’ve managed to maintain your income, refinancing your mortgage offers benefits. Refinancing allows you to take advantage of low interest rates, helps you save hundreds on your monthly payment and thousands in interest over the long term. If you are considering refinancing, an excellent first step is to contact a mortgage broker, who will ask some basic questions and then shop your application around to lenders to help you secure the best mortgage rate.

As for my refinance story, I ended up refinancing my mortgage through my mortgage broker in January 2021. My mortgage was up for renewal in about eight months, so the extra fees I incurred were worthwhile for the lower interest rate and the subsequently smaller monthly mortgage payment. I plan to save the extra money and build up my emergency fund so that if I do end up losing my job due to the pandemic, I’ll have an extra cash cushion to fall back on and lower monthly costs to manage.

Also read:

• 5 tips for mortgage renewal time
• How to get a mortgage with bad credit
• Can you get a 30-year mortgage in Canada?