Due to the Coronavirus outbreak, mortgage interest rates have dropped to an all-new low – with the Bank of Canada cutting its key rate from 1.75% to 0.25% and the 5-year bond yield dropping below 1%. As a result, many homeowners are opting to break ties with their current mortgage contracts to refinance at a better rate, and therefore ease their debt load during these tough economic times.
If you’ve been thinking about refinancing your mortgage over the last few weeks, here are just a few of many great reasons why now might be the right time to take action:
1. Substantial Interest Savings
Of course, the lower your mortgage rate, the less interest you’ll pay over the lifetime of your loan. If your loan is a 25-year fixed-rate mortgage of $200,000 with a 5% interest rate, you will have paid over $46,808 by year five alone (and a total of $148,963 over the lifetime of the loan).
However, by opting to refinance to a 3% interest rate over a 25-year fixed term (after year 5), you’ll pay just over $83,947 total in interest over the lifetime of your loan – amounting to a total savings of over $65,016. Even in the wake of penalties associated with breaking your fixed-rate mortgage (in this case, let’s say $12,000), you’d still benefit from thousands in savings over the next five years.
Ex: $65,016 savings ÷ 25 years = $2,600.64 interest per year x new 5-year term = $13,003.2 - $12,000 (penalty) = $1,003.20 savings
*Note: Penalties will vary by lender, be sure to seek the help of your mortgage broker for detailed information
2. Lower Monthly Payments
In addition to the long-term savings gained by lowering your interest rate, refinancing will also allow you to see immediate, short-term savings as it relates to your monthly mortgage payments. Using the example above:
25-year fixed-rate mortgage of $200,000 with a 5% interest rate = $1,163 monthly
25-year fixed-rate mortgage of $200,000 with a 3% interest rate = $946 monthly
By refinancing, you will see a savings of over $217 a month on your monthly mortgage payment, amounting to an extra $2,604 in your pocket annually. Here again, even with a penalty of $12,000 to break your contract, you’ll still be ahead an extra $1,020 in monthly mortgage payment savings alone at the end of your 5-year term.
Ex: $2,604 annual savings x 5-year term = $13,020 total savings -$12,000 penalty = $1,020 savings
3. Take Advantage of Helpful Home Equity
In short, home equity is the difference between the value of your home and your remaining unpaid mortgage balance.
Ex: Your home is worth $300,000 and you owe $200,000 on your mortgage, you’d have $100,000 in home equity.
Homeowners currently looking for more financial flexibility can refinance up to 80% of the appraised value of their home (less what’s left owing on the mortgage), using the additional funds as an emergency safety net, a means to up their TFSAs and/or RRSPs and more. Many homeowners also opt to use the additional funds as a down payment on a new home, allowing them to rent their current property as a means of increasing their cash flow, warding off inflation and diversifying their portfolio.
4. Consolidate High-Interest Debts
With the average non-mortgage consumer debt in Alberta nearing $35,000, now might be the time to take advantage of lower interest rates and monthly payments while reducing your debt load. In this scenario, you may opt for a cash-out refinance, with which you’d take out a larger mortgage on your home than what you currently owe, using the difference to pay off your high-interest loans – here again, potentially saving you thousands.
While the decision to take cash-out to refinance isn’t for everyone, it may make sense for homeowners who currently hold a significant equity stake in their property. Be sure to talk to your broker ahead of time to see if cash-out refinancing is the right option for you.
To my fellow Edmontonians: I would like to take this opportunity to wish you and your loved ones health and happiness during these uncertain times. All the best and remember, we will get through this together. In the meantime, if there is any way I can help address your mortgage-related questions or concerns, please don’t hesitate to reach out, I am always here to take your call.
Stay safe and talk soon!