How does refinancing your home work?
First of all, whether you’re talking about “remortgaging” or “refinancing” your home, they actually mean the same thing.
Refinancing your home allows you to use the net value or equity of your property to borrow money. The equity or net value refers to the difference between your property’s current value and the remaining balance on your mortgage.
One important point: you can refinance up to 80% of the value of your property minus the balance of your current mortgage, of course.
Here’s an example: let’s say your house is worth $300,000 and you have $150,000 left to pay on your mortgage. If you refinance it, you can borrow an additional $90,000: ($300,000 x 80%) - $150,000 = $90,000.
Your debt will therefore be revised to $240,000, which amounts to the current balance on your mortgage plus the amount you’ve newly borrowed.
When can I remortgage my home?
You can refinance your property at any time, as long as you’re eligible to do so, of course. You don’t have to wait until the end of your term when it’s time to renew your mortgage.
Is it a good idea?
For home renovations
Do you need one-time financing to repair the roof of your home, for example? Refinancing could allow you to access the money you need for the renovation while benefitting from low interest rates. “Remortgaging your home could allow you to collect these funds,” adds Mohamed Wakkak, Senior Advisor and Financial Planner at National Bank. “If you’re close to retirement, sometimes it’s better to do this rather than withdraw invested assets that generate earnings, especially when your house is debt-free.”
There are also other options. Are you familiar with the home equity line of credit? It’s the perfect product for financing the purchase of a home. Depending on the net value of your property, this line of credit gives you more flexibility since you have access to these funds at all times. You can withdraw money when you need it. You also decide on your payment amount and frequency. A home equity line of credit also lets you choose between integrating your regular transactions and your financing into a single account, or integrating all your existing National Bank accounts.
To buy a second home
You can remortgage your property to buy a second home. Talk this over with your advisor so you’re prepared. How much can you get by doing this? What will your monthly mortgage be? Will you be able to afford the fees incurred by both properties?
To pay off your debt
If you’ve accumulated debts with high interest rates, you could consolidate them by refinancing your home.
You could then save on interest or extend your loan period, thus reducing your monthly payments. Your advisor can guide you on paying off your debt and help you achieve better financial health.
You could also refinance your mortgage to invest. This strategy could prove beneficial if you want to finance an opportunity, like investments or buying rental property. This is a fairly complex financial lever. “First, you need to determine how much profit refinancing would bring you,” advises Wakkak. “Once that’s been calculated, you can get a better picture of the impact of each action.” Talk to your advisor or financial planner to make sure you understand all the advantages.
To invest in your RRSP
If you’re nearing retirement and you’ve accumulated contribution room for your RRSP over the years, this could be an interesting option for you. You could refinance your mortgage to collect funds and contribute them to your RRSP to ensure a more comfortable retirement.
“You’ll get a tax deduction on your current income and the investment will be tax-sheltered,” explains Wakkak. This strategy is recommended especially for people who are close to retiring. But it all depends on your overall financial situation. This option should be evaluated with the help of a specialized advisor.
To finance your retirement
“A house is an asset, but it’s not a liquid asset,” highlights Wakkak. So you shouldn’t count on it as a pure source of income to finance your retirement.
However, if you have recurring financing needs, keep in mind that there are other options for maximizing your retirement income that don’t involve refinancing your home. That’s why it’s very important to have a retirement plan and to meet with an advisor to explore all possibilities.
To start a business
“We see new entrepreneurs do this a lot,” admits Martin Cinq-Mars, Senior Advisor, Commercial Banking Sales Effectiveness at National Bank. “It’s often difficult for new entrepreneurs to find financing.”
Even so, don’t forget that remortgaging your home is a debt that you’ll have to pay off. Talk to an advisor about the options that are available to you if you want to start a business.
Finally, depending on your situation, mortgage refinancing may be a good idea. Before jumping in, it’s in your best interest to meet with your advisor – they’ll be able to help you choose the best strategy to invest in your goals and, most importantly, achieve them.