Sheila Cooper - CENTUM Mortgage Choice- Mortgage Broker-Partner

Do you want to eliminate the stress that this time of year can bring, and instead use it as a time to enjoy family and friends, without having to worry about what the New Year will cost you?

With the holidays behind us, you may want to consider taking some steps to make this the year you become debt free.

If your debts are feeling like they are beginning to climb and seem to be spiralling out of control, or if you are just tired of shelling out money without seeing your balances decrease, it might be time to consider a different approach. Making minimum monthly payments won’t get you out of debt therefore many people choose to refinance their mortgages as a way to consolidate debt, but is this the right option for you?

There are several reasons why refinancing your mortgage can be a great option for you. Firstly, because you are consolidating you are getting rid of that lengthy list of monthly payments and consolidating them into one payment. This can make keeping track of payments far easier and less stressful. Secondly, you can save a lot on interest. If you are carrying a number of different credit products, all with varying interest rates, all applied at different periods, you are paying out far more than if you have one larger total at a single interest rate. With mortgage rates still holding at such attractive rates, refinancing your mortgage makes sense.

Depending on how long you have owned your home and the current equity you have into it, you may be in a position to refinance and take out some of that equity.

In this blog, I am going to focus on refinancing for equity, which you may want to consider if you want to consolidate debt, need extra cash to pay off that debt from Christmas, planning on renovating your home, invest in RRSPs to generate a tax return or even purchase an investment property. In order to access this equity, you have three options. You could break your existing mortgage and begin a new one, take out a Home Equity Line of Credit (HELOC), or blend-and-extend your current mortgage.

When breaking your existing mortgage, you’re paying off your current mortgage and setting up a new mortgage. This gives you access to 80 per cent of the equity in your home, but also requires you pay interest on the total amount loaned from the very beginning. In addition, there are other fees and costs to consider, such as a penalty for breaking your mortgage, appraisal fees, etc. Depending on a number of circumstances, your Mortgage Broker or Lender can help you figure out if breaking your current mortgage is the best option.

A HELOC is different than a conventional mortgage refinance, in that it allows you to access your equity on an “as-needed” basis, instead of accessing the equity all at once. You’re able to withdraw as much or as little as you want, when you want, similar to a line of credit (LOC). You’ll only be paying interest on the amount you owe, and, as you pay off more of your principal balance, you’ll have access to more equity through your HELOC. It’s important to note that a HELOC is only available with a variable mortgage rate, and typically this rate is higher than a conventional 5-year variable rate mortgage.

With a blend-and-extend, you can increase the amount of your mortgage while renewing it early at the same time, effectively avoiding penalties for breaking your mortgage agreement. However, this means you’ll be locking into another term with your current lender.  When blending-and-extending, your lender will calculate a “blend” of your existing mortgage rate and the current interest rate for the term you’re agreeing to in order to establish your new rate for the duration of your new mortgage term.

So I am assuming you are now wondering …how do I know how much equity I can take out of my home?

To figure out how much equity you would have available with a refinance, here is a simple calculation using the following formula:

Accessible Equity = ([Property Value] x 80%) – Outstanding Mortgage Amount

So, for example: if your home was worth $300,000, and you had a balance of $200,000 outstanding on your mortgage, your calculation would look something like this:

Step One:

Accessible Value = $300,000 x 80%

= $300,000 x 0.8

= $240,000

Step Two:

Accessible Equity = $240,000 – $200,000

= $40,000

This means you’ll be able to access up to $40,000 of your home’s value in cash through a mortgage refinance.

So with all of the major positives there are some negatives. As appealing as an option this may be, the benefits are only open to those who qualify. Since mortgage refinancing requires increasing the lending limit on your current mortgage, you must have a mortgage to qualify. Therefore, if you are renting this is not an option for you, as you cannot get a mortgage to consolidate debt unless you already own your own home.

Another issue that many have when attempting to refinance is the fact that your credit needs to be quite good. If your credit limits are maxed out or you have missed payments, the lender is not necessarily going to have a lot of faith in your ability to repay your debt. In addition to all of this, lending guides only allow refinancing up to 80% of a home’s value, so if your debt will put you over this amount then consolidating all of your debts may not be doable. Despite the obstacles that are associated with qualifying, if you can secure the funding it may be the smartest option. If you feel you may be in a position to refinance, then talk to a Mortgage Broker or Lender and see what your options are. Obviously, there is a lot more involved but this gives you an idea of the basics and may be something you had not even thought was a possibility