The Why and When of Mortgage Refinancing

Posted on 23rd October 2019

According to recent data from Black Knight, 80% of mortgages originating in 2018 could benefit from refinancing. Coupled with data from the US Mortgage Bankers Association showing that refinancing applications are up 117% on last year, is it time you looked at refinancing your mortgage?

Refinancing is a way to redraw the terms of a mortgage. For the borrower, this usually results in a lower interest rate. This reduces the monthly cost and the ratio between paying off the principal debt and paying off the interest. The borrowing period of the mortgage is also reset, meaning that the lender can rely on your interest payments for a longer period of time.

One of the most common barriers to refinancing is penalty fees. Lenders often include a fee to refinance to cover expenditures they incur. So in the short term, a borrower may see a small decrease in their monthly payments paired with a large initial cost and decide it’s not a viable thing to do.

But is this correct view to take?

While both the monthly payments and penalty fees can feel more relevant, looking at them in relation to the lifetime of a mortgage can recontextualise them. Small changes in the applicable interest rate (up or down) compound in the long term.

The average Canadian mortgage value currently stands at around $200,000. Let’s compare the difference between a 30-year mortgage with a 4.25% interest rate and one with a 4% interest rate. Over the lifetime of the higher rate mortgage, the total repayment is $354,042. At 4% the borrower repays $343,573. With a 0.25% lower interest rate, the borrower saves more than $10,000 over the lifetime of their mortgage. That represents a 3% reduction of the overall repayment figure.

So even when factoring in fees for refinancing, the benefits are clear, borrowers can save a lot of money over the lifetime of their mortgage.

When to Refinance Your Mortgage

With the example above in mind, is it a surprise that Black Knight found that within the first 18 months, 80% of mortgages could be improved with refinancing?

In order to reap maximum benefits for refinancing, it needs to occur earlier in the schedule rather than later. The more time you spend paying in at a higher rate, the more money you’re spending that you don’t need to spend.

There’s also the interest-to-principal ratio to consider. The deeper you get into your mortgage schedule the more your monthly payment goes towards paying down the principal debt rather than paying off the interest. This ratio will be reset when you refinance and you take on a new schedule. After a certain point in the life of your mortgage refinancing can be a worse option. It’s better to pay two years at 4.25% and thirty at 4%, than fifteen years and then another thirty years.

Refinancing your mortgage can shave whole percentage points off the total repayment value of your mortgage and the sooner you do it, the greater the benefit you derive from it.

But refinancing often sits at a convergence point between a number of things that most people are reticent to deal with. Talking honestly about money, paying penalty fees, complicated math and the need to undertake some administrative work.

The independent mortgage experts at can help with the concerns you might have. They’ll be able to discuss knowledgeably, and confidentially, the different options available from the hundreds of different lenders they have access to. They’ll be able to guide you through the admin side of refinancing. Though you are applying for a new loan, the work done for your previous loan can form a basis for this one.

Our experts will always make sure you understand every aspect of your refinancing before going ahead.

To find out what options might be available to you for refinancing your mortgage, contact contact today and start a conversation about saving money.