Hidden Costs of Refinancing your Mortgage

Many people opt to refinance their mortgage because it seems like an ideal source of financing if you are looking to renovate your home, send your children to college, or consolidate debt. A mortgage can be refinanced with a loan-to-value ratio of 90% in Canada – to calculate the loan-to-value ratio, simply divide the total mortgage amount by the home value.

On the surface, refinancing might seem like an excellent and cost-effective option, but there are a number of other costs involved in the process, which will need to be considered if you want to profit from the entire refinancing process. If you are thinking of refinancing your mortgage, take these hidden costs into consideration, in order to determine whether you should go ahead with it or consider other financial options (e.g. a line of credit).

Mortgage breakage penalty

A mortgage breakage penalty usually comes into the equation if you decide to terminate a mortgage contract before it reaches the end of its term. Your current provider will help you understand the implications of this, in addition to aiding you in calculating it. To calculate a mortgage breakage penalty, you will need to use three months’ interest, or the interest rate differential (IRD).

Blended payments

A mortgage breakage penalty can be avoided if you refinance your mortgage with your current lender. Check to see whether your current lender provides you the option of adding an additional mortgage amount at a new rate while leaving the existing mortgage at the current rate. Here, it is essential to check whether the mortgage rate your current lender is offering is competitive – do not get blinded by the prospect of avoiding a mortgage breakage penalty. If the rate the lender offers is higher than the current rate you are paying, you might want to reconsider.

Mortgage default (CMHC) insurance

A mortgage default insurance is another hidden cost if you refinance at a loan-to-value ratio of 80-90%. The amount of mortgage default insurance you pay depends on the insurance on your original mortgage, and your particular loan-to-value ratio.

Original mortgage with CMHC insurance

Those whose original mortgage had CMHC insurance, will be required to pay only the insurance premium on the incremental amount as per the following terms:

Loan-to-value 80%: 2.70%

Loan-to-value 80-85%: 3.50%

Loan-to-value 85-90%: 4.25%

Original mortgage without CMHC insurance

For those whose original mortgage didn’t have CMHC insurance, an insurance premium will need to be paid on the new total mortgage amount as per the following terms:

Loan-to-value 80%: 1.00%

Loan-to-value 80-85%: 1.75%

Loan-to-value 85-90%: 2.00%