Refinancing, a scary word to some as it is often associated with extending/ increasing mortgage debt. As Canadians it has been ingrained in our brains to pay off our mortgage as quickly as possible but is this always the correct approach?

Refinancing is the act of renegotiating your entire mortgage. It is like starting over again with a clean slate. The lender, either existing or new, will payout your remaining mortgage balance and will register a brand-new mortgage on the title of your property. This can be done for several reasons including changing the people on title, accessing the equity in your property for cash to pay off other debts or investments and increasing amortization to reduce monthly payment.

Changing people on title – A refinance will allow you to add or remove co-signers as needed. Since this is a brand new mortgage, all applicants on the new mortgage will need to qualify. This can be used in cases where people signed on originally with their parents to qualify and later on down the road they are able to qualify by themselves. The parents are then removed from both the title and the mortgage.

Accessing equity – Typically this is the biggest reason that people refinance their homes. A refinance allows you to take out up to 80% of the current value of your home (as determined by an appraisal). Once qualified, the money can be used for a number of purposes such as paying off higher interest rate debts ( credit cards, auto loans and lines of credit), investing in the stock market or used as a down payment on additional real estate purchases.

Increasing Amortization – This is another very big benefit to refinancing. A typical mortgage has a life (amortization) of 25 years. Assuming no pre-payments are made, or payments missed, at the end of 25 years your mortgage will be paid off. By refinancing, you can increase (or decrease) your amortization to whatever you would like up to a max of 35 years. This spreads the balance out over a much longer period and depending on how much time is currently left on your mortgage could drastically reduce your monthly payment. If your mortgage payment is eating up the majority of your monthly income this can be huge as it takes the stress off of that mortgage payment coming out every month. For example, $300,000 mortgage over 25 years = monthly payment of $1,744, a $300,000 mortgage over 35 years = monthly payment of $1,504. Meaning almost $250 more in your pocket every month.