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Refinancing Options For Homeowners Amid Rising Interest Rates

Since the beginning of 2022, the Bank of Canada (BoC) has been taking measures to control inflation in the Canadian economy. They are doing this by raising interest rates and reducing their holdings of government and corporate bonds and mortgage-backed securities.

As a result, interest rates in Canada have reached their highest levels since before the global financial crisis. This has led to an increase in Canadian government bond yields and mortgage rates. The conventional five-year fixed-rate mortgage, for example, has risen to around six percent, nearly double its level during the housing boom of 2020-2021.

According to a recent report by the Canada Mortgage and Housing Corporation (CMHC), approximately 2.2 million mortgage holders will face an “interest rate shock” when they renew their mortgages in this higher-rate environment. This represents about 45 percent of all outstanding mortgages, totalling over $675 billion.

In the first half of 2023 alone, nearly 300,000 fixed-rate mortgage borrowers experienced this rate shock, resulting in a significant increase in their mortgage payments.

To mitigate the financial impact of rising rates when refinancing your mortgage, here are six options to consider:

  1. Breaking Up with Your Mortgage: Breaking your mortgage to refinance is generally not recommended, as it can lead to additional interest and penalties.

  2. Adding to Your Current Mortgage: Some lenders allow borrowers to add new mortgage components to their current mortgages, enabling them to borrow additional funds without affecting their existing low first mortgage rate.

  3. Second Mortgage: Older homeowners or those in need of extra funds may opt for a second mortgage. However, the interest rates for second mortgages can be high, even for borrowers with good credit.

  4. Prime HELOC: A home equity line of credit (HELOC) allows you to tap into your property’s value. However, the interest rates for prime HELOCs can range from seven to ten percent.

  5. Non-Prime HELOC: If you don’t qualify for a HELOC from a prime lender, you can explore non-prime HELOC options. Keep in mind that these may come with higher interest rates and fees.

  6. Blend and Increase: This option involves increasing your existing mortgage and averaging the old and new interest rates. However, it is not applicable to default-insured mortgages.

It’s worth noting that while the CMHC reports a low number of mortgage delinquencies, many households are struggling with other debts such as credit cards, car loans, and lines of credit. As pandemic-era mortgages come up for renewal, monthly costs for many households are expected to increase.

Whether financing is the path to achieving savings remains to be seen, as it depends on individual circumstances and financial goals.

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