While the lender requirements may seem fairly obvious, it may be a surprise to you that we are talking about borrower requirements as well.
This is because taking into account the true goals, objectives, and constraints of the borrower are many times overlooked. As a result, you may end up qualifying for a new mortgage to refinance your existing mortgage, but later discover that the new mortgage is not the best fit for your needs.
Let’s start with lender requirements.
For a bank or institutional home mortgage in Toronto, your new mortgage will have to be at no greater than 80% of the value of your home, otherwise it will need to be approved as an insured mortgage which will require you pay mortgage default insurance to one of the three mortgage insurance companies that currently provide this type of coverage in Canada.
Further, any mortgage refinancing under an insured mortgage can only secure financing up to 85% of the value of the home. So its going to be important to determine if the added cost of mortgage insurance is worth the additional 5% in mortgage principal acquired.
If you are refinancing through a new lender, you will have to qualify for one of their offered products or programs. Because it is a refinance, the costs associated with a new mortgage from a new lender are primarily appraisal costs and legal costs, and if the mortgage is insured, then mortgage insurance costs as well.
There can also be lender costs associated with the mortgage you are refinancing if the old mortgage is subject to prepayment penalty requirements.
From a borrower’s point of view it should also be important to consider your requirements for home mortgage refinancing.
When I speak of borrower requirements, the first thing to assess is the impact of the new mortgage on your cash flow. While you may be able to qualify for a higher payment mortgage in a scenario where the mortgage refinancing action will increase the outstanding principal to be repaid, will the higher payment fit into your cash flow or will it require some life style changes to accommodate a higher monthly debt servicing.
On the flip side, if you need to increase your amortization to keep you payment the same, are you comfortable paying your mortgage off over a longer period and incurring more interest costs.
Or if you are able to refinance to secure a lower interest rate that would allow your payment to decrease, do want to reduce your payment or keep it the same, which would allow your mortgage to be paid down faster?
Most mortgages today come with some type of prepayment privilege option to allow you to repay you mortgage faster if and when you have additional funds to apply to it. Does the prepayment payment options for mortgages you are considering meet your expected future requirements. Going one step further, some of the lowest cost mortgages have very stripped down features to provide the lower rate, so if you want the best rate are you comfortable with a low or no prepayment option?
The best process for determining what if any Toronto home mortgage refinancing action is suitable for a given scenario starts with a detailed review of the borrower requirements.
Once the borrower parameters and constraints are clearly understood, then an assessment of the available mortgage programs can be completed where upon a detailed review of the lender requirements will be completed for each mortgage program that is applicable to a given situation.
With all the relevant information in hand, the borrower is put into a proper decision making position for selecting the best home mortgage refinancing option.