For several years now my team and I have had numerous conversations surrounding historically low-interest rates and how challenging this investment environment can be for conservative investors who are seeking safe and stable income. Rates have paid next to nothing. Although we often view low rates as negative, it isn't always the case that low rates are bad, at least not when it comes to personal finances.
In particular, low-interest rates can be quite good for individuals who need to borrow money to finance the purchase of assets like a business or a home. It feels like each week since the pandemic began, there has been an e-mail in my inbox touting 'even lower' mortgage rates. It's not surprising that as rates have dropped that our team has seen an uptick in conversations surrounding mortgage refinancing. Who doesn't want to pay lower interest on the money they owe?
Because of this, I wanted to shed some light on some common refinancing mistakes our team consistently sees.
What is refinancing? A mortgage refinance is when you break your current mortgage agreement and begin a new one, either with the same lender or a different lender. Often individuals who are refinancing are looking to lock in a lower rate of interest than they currently pay. Or they might be looking to access equity that's built up in their home/property, by reborrowing some of the money back out to themselves to invest or use elsewhere.
Another reason individuals refinance is to consolidate high-interest debt they owe into a lower interest loans like a mortgage or home equity line of credit (HELOC). A mortgage refinance is not an insignificant financial decision and should not be made lightly. While successfully locking in a lower interest-rate has the potential to save you thousands of dollars over the term of the mortgage, there are risks and nuances that people need to be mindful of to avoid what can be costly mistakes.
Too many times we see individuals just accepting whatever rate their bank will give them, which surprisingly (or not surprisingly for some), is almost always not the best rate that's out there – or even the best rate that their current bank can offer. By engaging a mortgage broker, they can shop your mortgage around to different lenders who will have similar rates but with some differences in flexibility of terms, amortizations, lender incentives and more. For business owners who hold back on T4-ing a ton of income out to themselves, accessing good mortgage rates can be challenging. A broker will have insight into the lenders who will be willing to work with your unique circumstances. You're often able to access bank-like rates through lenders other than banks.
It's important to consider all the costs associated with refinancing a mortgage which include things like pre-payment penalties, mortgage discharge fees, mortgage registration fees, legal fees, and costs if an assessment is needed. Only then will you truly be able to determine whether or not the interest saved for lower payments is truly a decision that will put you in a better financial position. Some less well-known lenders will entice borrowers by offering lower rates but as always, the devil is in the details. Quite often these lower rates come with 'strings attached' like steep break penalties.
Larger lenders will often offer to pay for things like legal costs associated with the new mortgage as well as the costs associated with assessing the property's value if it's required.
For myself personally, I went through a refinance on a rental I own. The banking institution offered the same rate and term as the alternative lender but also agreed to pay for my legal and assessment fees. The catch was it came with steeper break penalties that could be costly if I decided to sell the property during the term of the mortgage. So, although I was going to save $1300 initially, I opted for flexibility to avoid getting whacked with large penalties down the road.
It's important to have transparent discussions with your mortgage broker and financial advisor to ensure you understand the pros and cons of each option you're contemplating. The point being, by considering elements other than just the upfront costs, you'll be better equipped to make a decision that fits within your life and any expected, or unexpected changes that may occur in the future.
- Brandt Butt, Investment Advisor, CIM
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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