Refinancing your mortgage with a low credit score

It’s not uncommon for many Canadian homeowners to think about mortgage refinancing as they approach the end of their mortgage term. This process, also known as remortgaging, means renegotiating the financial terms of your mortgage with either your current lender or maybe a new one. Whether you want to alter your rates or leverage your home’s equity to explore other financial opportunities, refinancing your mortgage opens up a world of possibilities.

That said, it’s crucial for every homeowner to evaluate if refinancing aligns with their needs. Most people may not know everything they should about remortgaging, and that’s where we can help. Let’s explore everything you need to know about mortgage refinancing, especially if you have a low credit score.

How does mortgage refinancing work?

As your mortgage term comes to an end, an ideal cost-saving opportunity arises for homeowners – remortgaging. While there’s no mandatory waiting period for refinancing your mortgage, doing so too early might lead to certain penalties that can be a slippery slope for some individuals.

In Canada, mortgages are contractual agreements with set durations. When nearing the end or even upon reaching the end of the contract, you can renegotiate your mortgage terms with your lender (or with a new one!). Mortgage terms vary, ranging from as short as five years to as long as 30 years.

With a 30-year term, waiting until the contract’s conclusion to consider refinancing might not be the most strategic choice. Instead of waiting three decades to refinance your mortgage, holding off until around the 10-year mark (after you’ve made a substantial dent in your mortgage) can provide opportunities for beneficial refinancing.

Refinancing your mortgage is no simple job and requires a lot of planning ahead of time to ensure you’re picking the best option for your financial future. Decisions like whether to stick with your current lender and the type of refinance you prefer are major parts of the decision-making process. As with anything in life, developing a greater understanding of your current situation and the variables can make mortgage refinancing a quicker process for you!

The different ways to refinance your mortgage

Remortgaging isn’t a one-size-fits-all process – it actually involves a few different ways to do it! You can either end your current mortgage early, incorporate a home equity line of credit (HELOC), or go for something called “blending and extending”.

Method 1: Breaking the mortgage

Breaking the mortgage is the most common way that people refinance and often means ending your existing mortgage contract with the current lender. You can negotiate new terms with the same lender, but when market conditions change and interest rates rise, many opt to collaborate with alternative lenders instead.

Timing is crucial when you’re thinking about breaking the mortgage. Banks and lenders often impose penalties, such as covering three months’ worth of interest. However, if the new mortgage rate beats the previous one by a long shot, the expenses associated with a complete switch might just be worth it.

Method 2: Adding a home equity line of credit

A HELOC (home equity line of credit) is like having your home’s equity ready to be used in a flexible bank account. It works similarly to a credit card, giving you a set spending limit that you can use whenever you’re in need. HELOCs boast lower interest rates than credit cards because they’re secured loans. Throughout the term, your main responsibility is paying off that interest.

Method 3: Blending and extending

Blending and extending can be a bit hard to understand, so let’s break it down. When we talk about “blending”, it means mixing your existing mortgage rate with new borrowed money at today’s market rates. “Extending” means extending your mortgage term, giving you more time to pay it off. However, it’s important to be careful when comparing blended rates to regular mortgage rates because they could come with higher interest costs.

There’s more than one way to remortgage

Once you’ve figured out the best way to refinance for your situation, you can pick between two main types of refinancing, depending on your financial situation: cash-out and rate-and-term.

Refinancing: Rate-and-term

Rate-and-term refinancing lets you make adjustments to your mortgage term, your interest rate, or both! It’s sometimes referred to as “No Cash-Out Refinancing” because it doesn’t involve giving out money to the borrower. This type of refinancing works great when you’re in a favourable financial position. If your credit score has improved and the housing market has fluctuated, this option can lead to a lower interest rate and reduced monthly payments.

However, getting access to unsecured loans might be more difficult, but they are still available to individuals with less favorable credit scores. Just remember, without collateral, you might face higher interest rates because lenders see you as a bit riskier.

Refinancing: Cash-out

Cash-out refinancing gives homeowners the opportunity to tap into their home equity in the form of additional funds. The new mortgage amount is more than what you owe, meaning you get to keep the additional funds associated. Unlike rate-and-term refinancing, cash-out refinancing opens doors to various opportunities for borrowers, such as paying for large home renovations or dealing with emergencies.

Keep in mind that this method often comes with higher interest rates, and the amount of cash you can get isn’t fixed. The amount depends on the house’s loan-to-value ratio. For some lenders, other factors such as your credit history might also come into play.

The advantages of refinancing

Remortgaging your home comes with several benefits:

Lower Interest Rates: While breaking your mortgage early might have some penalties: if the new interest rate is considerably lower, refinancing could actually be financially advantageous. Overall, refinancing can lead to monthly savings due to a change in interest rates, without altering the property’s value.

Access to Home Equity: Whether you use a line of credit or a loan, accessing your home equity opens up new possibilities. It can be your funding for large renovations or even fund you for a second property. By breaking your mortgage and refinancing, you can get a loan for up to 80% of your home’s value. Home equity loans resemble low credit loans, allowing you to use your own money for unexpected expenses.

Loan Consolidation: Leveraging your home equity gives you the opportunity to combine different loans, including debts from items like vehicles, education, or credit cards. Before you go for consolidation through refinancing, it’s important to make sure you have enough equity in your home.

What mortgage refinancing does to your credit

Initially, refinancing may briefly lower your credit scores, which happens due to the extra hard credit checks and new debt that come with the refinancing process. In good news, this is a completely normal part of the process when applying for any loan or credit line. The important thing to remember is that refinancing eventually leads to savings with lower interest rates and more flexible loan terms. In the long run, remortgaging actually helps boost your credit score. This, in turn, can be extremely helpful if you’re thinking of investing into a second home in Canada and need to meet the required credit score for a mortgage.

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