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.
BMO took the first shot over the bow a number of weeks ago when they came out with their 2.99% fixed rate for 5 years. The other four’s 2.99% fixed rates are for 4 year terms, but have other bells and whistles that are not part of BMO’s offering.
With reports that housing purchases are on the decline, the hyper competitive residential mortgage market is going after the mortgage refinancing, mortgage renewal segment of the market to retain and potentially grow market share.
And even with Bank of Canada reports that consumer debt in Canada sits at too high a level on average, mortgage money just got cheaper which could push the average debt even higher.
Lower cost fixed rates also provide the opportunity for those that have been riding the variable rate for the last decade to lock in for 4 to 5 years and reduce the risk of rates shooting up. With the difference between the 2.99% fixed rate and variable rates being around 0.6%, the time has never been better to lock in a fixed rate.
And with those who have a high level of debt, but not necessarily the lowest average rate of interest, these new 2.99% fixed rate offerings can provide the opportunity to reduce overall debt over the next several years with the same cash flow by reducing the overall cost of interest on an annual basis.
Its not exactly clear how long these rate offerings are going to last, so if you are looking at buying a new home, down sizing, consolidating debt, or moving to a lower fixed rate, it could well be worth the exercise to crunch the numbers for each of these programs and sign up for either a 4 or 5 year 2.99% rate mortgage.
In order to make the best decision now or in the future with your mortgage, we strongly suggest working with an experienced mortgage broker who can provide independent advice and help you with your mortgage financing requirements.
Because of the potential large supply for residential mortgage refinancing options, its going to be important to clearly understand the objectives for mortgage refinance so that the proper mortgage product can be matched up with the applicant.
But even before looking at available mortgage refinance options, the very first step is to fully understand the terms and conditions in place for the mortgage that you presently have and want to refinance into a new mortgage.
If you currently have a fixed interest term, then early prepayment of the mortgage is likely going to trigger an interest prepayment penalty, so its going to be important to know what that amount will be and if there are any ways you can minimize it.
The other area of initial work would be reviewing your credit profile and credit score as well as your cash flow and financial net worth to better understand the types of mortgage programs will be the best to focus on.
Armed with your objectives for refinancing, a solid understanding of the terms and conditions for the mortgage you want to pay out, and a good understanding of your credit profile and financial profile in terms of how a lender will view them, you are now in a position to consider different types of mortgage lenders and products for a residential mortgage refinance action.
Depending on your borrowing objectives, mortgage terms, and lending profile, there can be a considerable number of options available to you in the market.
All of the features of these program should be weighted against your requirements and borrowing capacity. And while interest rate is going to be a key component of any borrowing decision, there can be many other features that provide value to you that could even rule out the lowest interest rate candidates.
For instance, some of the mortgage programs that consider home mortgage refinance requests and provide the lowest market rates, also do not provide a great deal of flexibility with respect to prepayment options, payment adjustments, and so on. Stripped down rates can come with stripped down features, which can still be a good fit provided the program meets all or most of your requirements.
The best way to determine when and how to go about arranging a residential mortgage refinancing is to work directly with an experienced residential mortgage broker who can quickly assess and understand your mortgage refinance requirements and borrowing capacity, and provide relevant options for your consideration.
For residential home mortgage holders that had an insured mortgage in place prior to the rule changes, they potentially can still move their mortgage to another lender and retain their insured mortgage amount above 85%, provided that the amount of financing and amortization period do not change.
The major challenge with this is that most lenders have now adjusted their programs and will not consider a refinance of any type above 85% loan to value.
For those that want to refinance their current mortgage today and need greater than 85% loan to value, there are a few private mortgage lenders that will go up to 90%, but the cost is going to be considerably higher.
Another option to consider is a cash back mortgage.
Because the mortgage lender is providing cash back on the amount of the mortgage required, a borrower can get pretty close to 90% loan to value on mortgage products that are still pretty well priced once you take into consideration the cash back portion.
I more detailed explanation and example of a cash back mortgage strategy can be found at http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/04/90-insured-refinances-livesort-of.html
This can definitely be a viable option for squeezing out some additional funds out of your property without compromising on rates.
In order to know if this can work for you and what amount of cash back you may be eligible for, you’re best approach would be to work through an experienced mortgage broker that can identify the most relevant cash back mortgage programs and help you with the math so you’re clear on what the effective cost of financing will be and how your cash flow will impacted on a monthly basis going forward.
If you have a residential home mortgage and are thinking about a Toronto home refinancing action, there are a couple of schools of thought to consider, depending on why you’re looking to refinance in the first place.
While there may be many potential reasons for refinancing, I can stick most reasons into one of two buckets.
The first bucket is an immediate short term need to consolidate debt and/or generate incremental cash flow.
The second bucket is about the desire to try and reduce the cost of interest you’re paying on your mortgage.
The process of refinancing needs to consider two groups of costs and their related cash flow considerations. The first group includes the costs related to retiring the existing mortgage.
The second group of costs is the go forward cost of the new mortgage with respect to interest costs, insurance costs, etc.
Home mortgage refinance on a variable mortgage could significantly minimize the group one costs as there will not be any prepayment penalty associated with repaying the old mortgage with a new one.
With a fixed rate mortgage, the opposite is true with prepayment penalties tending to be the most significant cost item.
If you’re in a situation where you must refinance in the short term, then its all about getting all the pieces lined up for the least amount of cost in the shortest period of time. You can lock in an interest rate for 120 days and try to get the best go forward rate available during that period. You can try to renew the mortgage early with the existing mortgage holder to reduce breakage fees. There may be a few things you can do or consider, but its going to be limited.
For lower interest rate seekers where time is not of the essence, the focus should be more towards understanding the structure of your mortgage with respect to early repayment and/or renew, plus the short term and long term out look for interest rates. The goal is to monitor the market and act quickly when everything lines up in your favor.
This is true of a home equity loan, insured mortgages, a rental property mortgage, and so on.
The world events in Libya and Japan in recent weeks remind us of how potentially volatile the financial markets can be and how major events that we did not expect can potentially change both our short term and long term out looks for things like mortgage interest rates that are tied closely to the economy and the financial money markets.
And while there is way to predict when world events, good or bad, or going to happen or how they will influence rates, recent history shows that while interest rates in general may trend in a certain direction, there are always short turn changes in direction that can be beneficial to those that recognize them and take action at the appropriate time.
By understanding the process of home refinancing, and taking action when the market moves in your favor, you’re more likely to create a benefit for yourself.
Regardless of whether or not you need to refinance right away or have time on your side, understanding the process and making good decisions based on the available information is going to be important for best results. To accomplish this, we strongly recommend that you work with an experienced mortgage broker who can guide you though all the information that’s relevant to your situation and help you get the best deal in place when you need to take action.
Home mortgage refinancing can be required for a number of different reasons, but regardless of why you’re going through the home mortgage refinance process, here are a few key things you should always keep in mind.
First, start the process as soon as possible. Even though residential mortgage financing can be located and secured fairly quickly, it still can take time and you don’t want to be placed in pressurized situation where time is running out and you’re forced to take a less than optimal home mortgage refinance option.
The mortgage market also can have a lot of programs and options available to you, depending on your credit and financial profile, so its going to take some time to figure out what the market has to offer and who is going to give you the best deal.
Because lender programs and current offerings are subject to change, the market may be somewhat different from what you remember from the last time you had to go through the mortgage application process, which in the case of a 5 year fixed mortgage may have been 5 or more years ago.
Second, if you can help it, don’t try and secure a maximum leverage position on refinancing. The more room you have available in your credit profile as a whole, the more lender interest you’re likely going to have. If you’re primary refinancing goal is to get the best rate available, then having some competition for your business will likely be a good thing.
Third, consider working with an experienced mortgage broker. As we mentioned earlier, it can be hard to gain a proper and thorough understanding of the mortgage market at a given point in time, especially when you’re not working in it on a day to day basis.
A residential mortgage broker has the advantage of working with a large cross section of lenders and will also have a working knowledge of who is being more competitive or aggressive on rates and who isn’t for the type of application you are going to be putting forward.
The mortgage refinancing process can also involve some significant mathematical analysis, especially if there are prepayment penalties involved. A residential mortgage broker will work through each potential scenario with you to help you arrive at the best option.