Refinancing your mortgage can be a great way to consolidate debt and ease your financial standing, but there is one important consideration to make: the timing.

If you’re thinking of refinancing your mortgage before your five-year term comes to an end to access home equity, you need to consider the pros and cons.

Pros:

Accessing home equity through a mortgage refinancing can allow you to put your debts into one payment. You can pay off your outstanding, higher-interest debts with your home equity, and then pay off your mortgage loan through one, monthly payment — likely with a lower fixed-interest rate.

Cons:

If you are breaking your current mortgage before the current term is up, it may not be cost-effective.

When thinking about using home equity to consolidate debt, you have to consider:

• The rate your mortgage is currently at vs. the current mortgage rates.
• Prepayment penalties.
• The amount you owe on your current mortgage in proportion to your debt.
• The amount of equity you have and your credit standing.

Let’s look more at these.

A. The rate your mortgage is currently at vs. the current mortgage rates.

Is the current lending rate higher than what you are paying on your mortgage? If it is, then it may cost more in dollars and cents to increase your entire existing mortgage by 1-2% to pay down debt.

Mortgages are usually much higher than what most people carry in personal debt. If you already have a good mortgage rate, then refinancing for a higher rate may not be the wisest decision. You could be paying more in the long run.

B. Prepayment penalties.

These can get quickly get expensive if you are refinancing before your mortgage renewal.

These penalties could include:

• Mortgage prepayment penalty (normally the equivalent of three months’ interest).
• Mortgage discharge fee. If you are switching lenders, you may be charged this. Fees are typically between $200 to $350.
• Mortgage registration fee. This is typically around $70 but varies by province.
• Legal fees. This can vary widely, but are, on average, between $700 to $1,000.

Be sure to look at your current mortgage contract to see what the terms are and consider what the penalties may be if you were to refinance early.

C. The amount you owe on your current mortgage in proportion to your debt.

Consider this example: you have a $300,000 mortgage at 3% interest and 15 years of amortization left on your mortgage. You also have $40,000 in credit card debt at 14% interest. You’re considering refinancing to a new mortgage rate of 5% over a 30-year amortization.

On the plus side, you’ll be getting rid of your high-interest credit card debt quickly, but on the negative side, you will be making mortgage payments for far longer than you otherwise would have if the amortization schedule hadn’t been extended.

If you refinance your mortgage and have to make higher payments each month, you also risk the danger of defaulting on your mortgage if you can’t afford the monthly payments.

D. The amount of equity you have and your credit standing.

Do you even qualify for mortgage refinancing?

New mortgage regulations and changes in the housing market may mean that refinancing is going to be more difficult than you may think.

All Canadians now have to pass a stress test to make sure they can afford their mortgage. If you are refinancing your mortgage, you may have to qualify at the higher stress-test rates rather than your existing contractual mortgage rate.

And, if your credit is bruised, you may not be eligible for refinancing, or you may not have enough equity available in your home.

Solutions

If you have home equity but don’t want to refinance your mortgage, a secondary financing product may make more sense. It would carry the same benefits — one payment and lower interest than credit cards — but it wouldn’t impact your first mortgage.

If you think you can’t refinance because you don’t have enough equity in your home, you can still likely consolidate debt using other financial avenues. A good financial consultant can educate and arrange these for you.

At DebtCare Canada we can help you weigh your debt consolidation options, whether you are refinancing your mortgage, considering a secondary financing product, or otherwise.

Contact us today for a free consultation. Call 1-888-890-0888 or visit www.debtcare.ca.