Is refinancing your mortgage worth the interest hit right now?

Given the current state of interest rates, it’s fair to say it’s still difficult to gauge whether now is a good time to make any sudden mortgage moves. While higher interest rates continue to be a stressor for homeowners with variable-rate mortgages and those renewing fixed-rate mortgages, those contemplating refinancing are between a proverbial rock and a hard place.  

Refinancing, in order to consolidate debt or access equity in your home, means weathering a hit to your interest rate, and is a choice that Chris Allard, mortgage broker with Smart Debt Mortgages, says currently comes down to managing increased costs of living for many of his clients.  

“Right now, most commonly, we're seeing refinances mostly for cash flow restructure,” says Allard. “So, if someone's accumulated a bit of debt perhaps, they may want to include the debt in their mortgage. Or, if they have a mortgage renewal coming up and their rate is much higher than it may have been five years ago, some people are choosing to re-amortize.” 

Extending or integrating high-interest debt is just one of the reasons Canadians might choose to refinance their mortgage ahead of their renewal, regardless of whether they hold significant equity in their home. Some examples of reasons to reconsider your financial position include significant vehicle payments or a change in your employment status.  

Why refinance your mortgage?  

Current mortgage holders have either already seen their rate increase from when they initially signed their term (variable-rate mortgage holders) or will soon see a much higher rate at renewal (fixed-rate mortgage holders). Allard says that in the current rate environment, refinancing your mortgage should be treated as a complicated and drastic option rather than a simple way to relieve an urgent need. Whether refinancing is a good choice often boils down to the very simple question of if a homeowner can currently afford their payments, he says. 

“At that point, if they're feeling like they may have difficulty making payments in the near future, it's probably best to make an adjustment now rather than later, even if there is an interest adjustment.” 

In other cases, like trying to access a relatively small amount of home equity to reinvest elsewhere, Allard suggests people look at a small second mortgage or a home equity line of credit (HELOC) rather than radically changing their current agreement. These options can be assessed through three main types of lenders: standard banks (think: RBC, Scotiabank, etc.), your local credit union, or dedicated mortgage companies like First National Financial.  

Consider mortgage penalty fees and compare mortgage rates when refinancing 

While any conversation about your mortgage tends to revolve around your interest rate, penalties are just as important to factor in. If you choose to refinance, Allard says to decide if you intend to break the contract at some point during your term before deciding between a fixed or variable rate. Variable-rate mortgages have smaller penalties than fixed-rate mortgages, particularly those funded by banks as opposed to mortgage companies.  
 
“If [the client] intends to break the mortgage contract, variable might be the best way to go because the penalty to break a variable-rate mortgage is three months’ interest, which is the smallest penalty type, whereas a fixed-rate mortgage can be a rather costly penalty,” says Allard. 

While comparing mortgage rates is as important as always, it isn’t the only factor when it comes to choosing whether to refinance. The costs associated with breaking your mortgage early and taking on a higher interest rate may outweigh the benefits of refinancing.  

The choice will come down to your comfort level with risk and your current ability to make your payments.