When managing your mortgage in Canada, you may encounter two terms: mortgage switches and mortgage refinancing. While both options involve making changes to your existing mortgage, they serve different purposes and have distinct implications. Let’s demystify the difference between mortgage switches and mortgage refinancing, helping you make informed decisions about your mortgage strategy.

As the name suggests, a mortgage switch refers to moving your current mortgage balance and remaining amortization from one lender to another. It allows you to transfer your mortgage from your current lender to a new one, potentially benefiting from better terms, rates, or features the new lender offers.

On the other hand, mortgage refinancing involves replacing your existing mortgage with a new one. Homeowners pursue refinancing to take advantage of low-interest rates, consolidate their debt, access the equity they’ve built up in their homes, or change their mortgage type. To qualify for refinancing, you need to have at least 20% equity in your home. Refinancing can save you thousands of dollars over the life of your mortgage by lowering your interest rates and monthly payments.

Refinancing offers several benefits worth considering. Firstly, you can achieve a lower monthly payment by taking advantage of historically low-interest rates. Even a 1% reduction in interest rates can result in significant monthly savings.  Refinancing also allows extending amortization to reduce monthly mortgage payments, improving cash flow. Additionally, refinancing allows you to pay less interest over the course of the loan, providing financial stability and giving you access to more cash for unexpected expenses or maintaining your current lifestyle amidst uncertainties.

Is It the Right Move for You?

One of the biggest advantages of refinancing is accessing the equity you’ve built up in your home over the years. By calculating the difference between your home’s total value and your mortgage balance, you can determine how much equity you have. This equity can be used for home renovations, paying off high-interest debt, investing in education, or even purchasing an investment property. It opens up possibilities and provides a valuable source of funds for homeowners needing a significant amount of cash. 

While both mortgage switches and refinancing offer benefits, it’s important to consider the downsides as well. Refinancing may involve prepayment penalties and additional costs such as mortgage discharge, registration, and legal fees. It’s crucial to assess these expenses and weigh them against the potential savings and benefits of refinancing.

Deciding Between Refinancing and Switching Your Mortgage

  • Understand the difference: Mortgage refinancing involves replacing your current mortgage with a new one, while mortgage switching refers to transferring your existing mortgage balance and remaining amortization to a new lender.
  • Evaluate your financial goals: Determine why you are considering a change. Are you looking to lower monthly payments, access home equity, consolidate debt, or change your mortgage type? Clearly defining your objectives will help guide your decision-making process.
  • Compare interest rates: Research and compare current mortgage rates offered by different lenders. Lower interest rates can potentially reduce your overall interest payments and monthly mortgage expenses. Ensure that the potential savings outweigh any associated costs and fees.
  • Assess prepayment penalties: Breaking your current mortgage term for refinancing or switching may incur prepayment penalties. Contact your lender to understand the fees, which can vary significantly. Consider the penalties alongside potential savings to determine if it’s financially advantageous.
  • Calculate costs and fees: Apart from prepayment penalties, refinancing also involves other costs such as mortgage discharge fees, appraisal fees, mortgage registration fees, and legal fees. Evaluate these expenses to determine if the benefits outweigh the upfront costs.
  • Qualification criteria: Keep in mind that both refinancing and switches require applying for a new mortgage, which involves meeting the lender’s qualification criteria. This includes factors such as credit score, debt-to-income ratio, and overall financial stability. Assess your eligibility and financial situation before pursuing. 
  • Consider market rates and opportunities: Refinancing can be favourable when lower mortgage rates are available. Refinancing can provide access to funds at a lower interest rate if you aim to consolidate high-interest debt, renovate your home, or explore investment opportunities.

Understanding the differences between mortgage switches and mortgage refinancing is essential when managing your mortgage in Canada. A switch involves transferring your mortgage balance to a new lender, while refinancing entails replacing your current mortgage with a new one. Refinancing offers the benefits of lower monthly payments, reduced interest over the loan term, and access to home equity. However, it’s important to consider prepayment penalties and associated costs. Evaluating your financial goals, comparing interest rates, and assessing eligibility criteria are key factors in making an informed decision. Seek guidance from a mortgage broker to navigate the process and determine the best option for your needs.


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