February 18, 2022

What is property refinancing?

You have some great projects in mind, but don’t have the cash. Have you ever thought about refinancing your property? By borrowing against the equity you’ve accumulated in your home, you can obtain the funds you need. Here’s what you need to know about mortgage refinancing and how to use it.

What is property refinancing?

Even you are still paying off the mortgage, a percentage of your home’s value belongs to you.    

Mortgage refinancing involves borrowing against your home’s equity. This value is calculated by estimating the market value of your property minus the amount you have left to pay on your mortgage. For example, if your home is worth $500,000 and your mortgage is $300,000, then your equity is $200,000.

If the estimated value of your property has increased since you bought it, the equity includes the amounts you have paid back plus the appreciation on your property.

What is the borrowing limit?

You can borrow up to 80% of the appraised value of your property, less the balance owing on your mortgage.

If you wish to obtain a second mortgage, perhaps to buy a rental property, the limit is also 80%. However, if you wish to obtain a home equity line of credit (HELOC) for renovation work, you can borrow from 65% to 80% of your home’s appraised value depending on the financial institution.

Mortgage refinancing can also be used to obtain a reverse mortgage, but the credit limit is only 55%. A reverse mortgage allows you to withdraw money from your property, in particular to finance your retirement.

Is mortgage refinancing advantageous?

Using the accumulated equity in your home can be a great way to carry out various projects. However, you must be careful and remember that you must repay this loan.

  • Refinancing your property can be used in several ways:
  • for major repairs or renovations
  • to buy a cottage
  • to consolidate your debts and take advantage of a better rate.

You can also use the equity for investments, particularly in RRSPs. Obviously, it is advisable to consult a specialist before carrying out this type of transaction to ensure its financial viability.

A line of credit

A home equity line of credit gives you the flexibility to carry out your projects, such as:

  • redoing your roof
  • replacing the old rotting porch
  • carrying out urgent repairs
  • building a new room above the garage for your teenager (and their electric guitar)!
  • enlarging the kitchen, etc.

Mortgage refinancing is a simple way to free up the funds needed for a down payment on a second property

How does it work?

To refinance your property, you must first be eligible. If your project involves the purchase of a secondary residence or improvements to your current property, there are clear benefits to teaming up with a real estate broker.

Your broker will help you assess the feasibility and profitability of your project. For instance, they can advise you as to which renovations add the most value to your home at the time of resale. Your broker can help you weigh your options and make prudent choices.

They can also help you prepare your file, particularly with regard to your home’s market value. It is therefore advisable to consult a broker before filing an application with your financial institution.

To learn more, consult a broker today.

See also:

How do you pay off your mortgage faster?

How a good credit score can get you on the property ladder

How do I take advantage of FHSA when buying a first home?

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