There are several key factors to think about when considering a refinancing agreement – the type of your current mortgage, savings achieved through refinancing, the length of amortization period and urgency of financial need.
It is possible to renegotiate the terms of your mortgage at a later point, but whether this is a smart move or not depends on some factors.
A typical homeowner in Canada is burdened with a large mortgage, with no true relief in sight in many years. There is, however, one possibility to redistribute the debt by applying for a refinancing loan, either from the same lender or a competitor. While this can be a rational solution in some cases, it’s not an easy decision to make and requires a lot of deliberation to determine its long-term consequences.
Here are some important details that could inform your decision on mortgage refinancing and assist you in making the right move at exactly the right time:
Type of mortgage
If your loan is calculated with a variable APR, you might not need to apply for another loan to achieve savings, as any decrease of the prime rate will be automatically reflected on your monthly bill. However, borrowers tied to fixed rate contracts (as most Canadians are) could be locked into an unfavourable deal, with loan renewal as the only viable option on the table. Make sure you read the fine print in your loan agreement and analyze the exact conditions before rushing to file an application for a new one.
Refinancing makes sense only as a strategy to reduce or reorganize debt in a way that’s profitable in the long run. It’s always made with an eye towards the future, so it is very important to add up the numbers and estimate how much you can save over the lifetime of the deal. That’s far more important than immediate relief on your current mortgage rate, and you shouldn’t allow temporary hardship to push you into a bad decision since the blowback of a poorly structured loan could devastate your plans.
Many homeowners extend the amortization period when they apply for a refinancing loan. While such a move will certainly lower your monthly obligations and provide you with more breathing room, it entails additional risk since it forces you to stay in debtor’s position for several years longer. Again, this is not something to be taken lightly and demands a serious discussion with your family, as well as financial advisors. It may be justified only if it allows you to buy a better, larger home in a good neighborhood.
Current financial situation
All of the previous considerations fade before the inevitability of making ends meet on a daily level. If your revenues deteriorate to the point that you can’t reasonably manage your debt and living expenses with your current income, you’ll have no choice but to think about refinancing. Provided you are lucky enough that such need arises during the period of low APR’s, this can actually work to your advantage. That’s why any mortgage holder should be following whether interest rates in Canada are moving up or down at all times.