Did you know you can use your home’s current market value to take out a low-interest loan? This is called refinancing your mortgage, or an equity take out (ETO).
You see, after you buy your home, it builds equity (i.e. it appreciates in value). The price you bought it at is not the price it’s worth after 2 years, 5 years, 10 years or more. If you’ve been a homeowner for a while, most likely, your home can sell for a lot higher than the price you bought it for. Plus, since you’ve been paying down your mortgage, your repayment balance will be lower, too. The amount you have paid off will increase your ‘real’ ownership percentage in the home.
You could sell your home for a profit, to get access to the cash that is ‘locked’ into it. But, you don’t have to. Instead, you can opt for Vancouver mortgage refinancing. This will essentially use your home as collateral against a new loan. You’ll pay it back over time, like you would with your current mortgage.
Refinancing a mortgage in Canada can come with benefits and downsides. Sometimes, the solution for you is actually a renewal or transfer. Or, perhaps a home equity line of credit (which is different than a refinancing or equity take out scenario!).
It all depends on the specifics of your case. Factors such as:
- When you plan to repay the withdrawal amount
- How much you want to withdraw
- What you want to use the funds for
- Whether or not you want to save on interest
And more, can determine the best strategy for you.
Knowing when to refinance a mortgage, and when not to, is key…
Some people take equity out on their home to pay for a child’s college tuition or living costs. Or, they do so to renovate their home. In these cases, other programs may be available, which can be better suited to the situation (i.e. you’ll come out ‘on top’ with other methods compared to refinancing).
Another reason to refinance for a home equity take out (ETO), would be to pay off debt – be it a car payment, credit card, line of credit, second mortgage, etc. If your motive is debt-driven, it will be important to look at all your consolidation options, since refinancing correctly can provide some relief. For example, consolidation can also mean significant savings on a second mortgage, if it can be combined with a first mortgage.
A final reason people choose to refinance is to change the terms of their mortgage. It can sound too simple to be true, but even removing a family member’s name off of a mortgage title can require refinancing. Sometimes, this can be done by getting a better rate at the same time. Other times, it is done urgently for the sole purpose of releasing an owner’s name on a mortgage, so they can build their own equity, or take out a loan, elsewhere.
As you can see, the motives for refinancing a mortgage can be broad, and person-specific. Your best bet is to speak to a qualified, experienced and savvy mortgage broker in Vancouver. Not only is there no obligation, and no cost to you to do so, they will be able to give you a better, overall picture of your options. They can look more closely at your financial situation, and make recommendations on what may work best for you.
At our mortgage company in Richmond, we make this process as simple as possible. Contact us today, and we’ll get started right away!
Below we’ll answer some common FAQs on the subject of refinancing a home in B.C. or in Canada.
How much of my home’s equity can I access for cash?
While different lenders can have different rules in place, the typical scenario is that you can take up to 80% of your home’s current value as cash flow, if you refinance.Read more
For example, let’s say you bought a home for $300K, and the mortgage has $200K left on it. Today, the home’s appraisal value comes in at $320K. You can refinance up to 80% on that $320K.
What does that mean when you factor in the existing $200K mortgage loan?
The math goes like this:
80% of $320K = $256K
$256K – $200K (the current mortgage balance) = $56K
So, your total equity take out (ETO) can allow a maximum cash withdrawal of $56K.
How can I use my home’s equity to increase my other assets and net worth?
If you are ready for some advanced money strategies, we can help with refinancing deals. Mortgages generally have lower interest rates than other types of loans. So, financially savvy homeowners sometimes use their home equity take out (ETO) to invest in other assets that will yield higher returns.Read more
To give some oversimplified examples (but ones that still demonstrate the point):
You can use an equity take out of $100k at a mortgage rate of 2.49%. Then, you can reinvest that $100k into something that yields 6% interest. You will profit at a rate of 6% – 2.49%, which is 3.51%.
Businessowners can also use a home equity take out to invest in their company. For example, they can buy new equipment to skyrocket production levels, potentially leading to higher sales volumes.
In either of the examples above, the profits can be used to pay back the loan on a refinanced mortgage.
Will there be fees or other cost considerations when refinancing a home?
Yes, and this is important to consider.Read more
For one, a solicitor will need to be involved, and there will be legal fees associated with their job in the process. Depending on the mortgage amount, the lender may be willing to cover this cost for you (it’s usually when it’s over $200K that they’ll consider it).
More importantly, if you break your mortgage term to refinance ahead of your renewal date, your lender may charge a prepayment penalty. This can amount to three month’s interest on variable mortgages. Or, on fixed mortgages, it can be the interest rate differential payment (IRD), if it is greater than three month’s interest.
Whether or not you stay with your current lender, refinancing can also imply higher interest rates overall. Most notably, current lenders can impose what’s called a “blended rate,” if you choose to refinance before your renewal date and wish to increase your mortgage amount (i.e. to refinance). When this happens, the current lender may waive the penalty fee, or reduce it.
Refinancing with a blended rate will combine the interest rate on the original mortgage, with the interest rate on the refinanced mortgage amount. You’ll get an ‘inbetween’ rate. These blended rates are almost always higher than current market rates. So, in some circumstances, you’d be better off paying the penalty, and switching providers, than to pay the blended rate. But, not always.
Plus, if you extend your amortization period during the refinancing negotiation, in the long run, you will also be paying more in interest, regardless of the rate.
Of course, refinancing a home is essentially increasing your mortgage loan amount. As with any loan, there will be interest payments on the dollar value of the loan itself.
However, if you are already paying high interest on another loan, it may be better to refinance your home in order to take advantage of lower rates with the bank. With the equity take out (ETO) from the refinanced mortgage, you can pay off credit card debt, for example, and then pay that balance to your bank over time, at a lower interest rate. Note that when refinancing to consolidate debt, a lawyer will be the one to distribute funds to your payees.
Now, you may be asking: if I’m at the point of renewal, won’t a lender pay my penalty fees to go with them? And, won’t I get a lower interest rate anyway, by doing this?
The answer to this is: sometimes, yes. But it depends on the lender. And, there are lots of them. The system as a whole can be hard to navigate. Mortgage brokers are trained to do this as their full-time job. They’ll have the know-how to help you through the process of finding out your best option: whether to refinance or renew your mortgage at a different rate (or both, at the same time). Or, they can come up with a whole new strategy you may not have thought of.
A good, independent Vancouver mortgage firm will be able to shop the market for you extensively. They can get you the lowest rates possible on a refinancing scenario. We encourage you to get in touch today, so we can do the ‘heavy lifting’ for you!
What are the limitations of refinancing a home for equity take out?
Refinancing a property can only be used in some situations. It can also come with limitations you should be aware of. For example:Read more
You can not refinance if you are currently defaulting on your mortgage (i.e. not paying the monthly payments). Cash from refinancing can not be used to pay back monthly payments that were missed.
If the home is not yet built (e.g. a presale, or new construction), it can not be refinanced. Refinances are only eligible on completed homes.
A primary property being refinanced must not contain more than four units, and the owner must occupy one of those units. A secondary property being refinanced can not contain more than two units. The owner does not need to occupy any of these secondary units.
Amortization periods on refinances can not be extended beyond 30 years. That said, this extension allowance is useful if you prefer to lower your monthly mortgage payments. Of course, it will also mean paying more for your home in the long run (due to interest accumulation).
Refinanced home mortgages can not be insured if they are extended beyond 25 years (whether or not they were insured to begin with). This can imply higher interest rates, since there will be more risk for the bank without insurance.
A home that was purchased with mortgage default insurance at a loan-to-value (LTV) of more than 80% will not be eligible for refinancing. This is because refinancing is only eligible for up to 80% of the appraised market value of the home. If a mortgage was insured at an LTV of more than 80%, the only way to refinance would be to pay off the mortgage to the extent that it can be eligible for further refinancing. Or your home value would need to significantly increase. One way or another, you’d need to get the LTV ratio lower than 80% for refinancing to make any sense.
To give some examples:
Let’s say you started with a 10% down payment on a home, using an insured mortgage. You’ve been paying off your insured mortgage for a long time, or with higher repayments each month. Now, your ownership in the home is at 30%, leaving an LTV of 70% remaining on the mortgage. At this point, it can be refinanced for an equity take out of 80% at the home’s current market value. This can get you the extra 10% of the home’s value in cash (which you have to pay back).
Or, perhaps you bought a home for $500K, with an insured mortgage of $450K, leaving you with an LTV of 90% (i.e. $450K / $500K). After three years, the home’s value sits at $600K. Your mortgage balance will be at slightly less than $450K by this point, since you’ve been making payments on it. However, even if it were still at $450K, with the new $600K home price, your LTV would now be at 75% (i.e. $450K / $600K). This would qualify for refinancing at an extra 5%, bringing you up to the 80% LTV threshold.
Withdrawals on home equity take outs can only be done twice. On the one hand, this means you can save on interest by only taking part of your lump-sum of available cash, when you need it. But on the other hand, it means you only have two chances to take out the cash so you can start paying interest on it; it’s all or nothing after the first withdrawal.
You will need to go through all the same application steps you went through to get your first mortgage. This means a credit check, proof of income statement, and so on. If these details have changed, it may be harder to get approved for an increased loan amount, even if your home is now worth more.
How can I get the lowest interest rates and fees possible when refinancing my mortgage?
We can get you the lowest rates possible on mortgage refinancing deals. This is achieved not just by our extensive research efforts (which we also do!).Read more
You see, we work with Clear Trust Mortgages (Dominion Lending Centres). Our brokerage firm sends more than 1 billion dollars in mortgage volume annually to lenders, collectively. They are the largest mortgage broker firm in Western Canada. Because of that, lenders provide us, their reps, with a variety of mortgage products, exceptional rates, fast turnaround times and flexibility with approvals.
We are not beholden to what a bank or existing lender can offer you. We can shop the market to get you better deals, and more options.
So, you can’t go wrong when working with a mortgage broker at our company!
Start strategizing your Vancouver home equity takeout and mortgage refinancing options!
If you’re in need of immediate cash flow, and already own a home that has appreciated in value, there may be no sense in leaving your equity in dormancy. Don’t just live in your house; use it to better your financial future.
Whether to square up on debt, pay for a big purchase or reinvest elsewhere, our mortgage specialists can help you find the best strategy, at the best rates possible, to achieve your goals.
Contact us today, and we’ll get started on your plan!