Refinancing Your Home in Quebec: A Complete Guide

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In Quebec and Canada, homeowners can refinance their homes to access funds for an ambitious project or to optimize their financial situation. Discover everything you need to know about home refinancing and understand the implications of this process to choose the strategy that best suits your needs.

Mortgage Refinancing: What Does It Mean to Refinance?

Mortgage refinancing, also known as home refinancing, is a financial strategy that enables homeowners to leverage the equity in their property to obtain a new loan with more favorable terms. Refinancing your home can be a beneficial approach, giving your budget some breathing room:

How Does It Work?

This process enables homeowners to access funds equivalent to the difference between their property’s market value and the remaining balance of their mortgage loan.

What Interest Rate Is Applied?

Refinancing allows you to obtain a mortgage loan with an interest rate generally more favorable than those offered for most other credit and loan products, such as credit cards, personal loans, or personal lines of credit. By refinancing your home, you can borrow up to 80% of the market value of your property after subtracting your current mortgage balance.

How Is the Interest Rate Applied?

This solution comes with a new interest rate that applies to your entire mortgage loan and differs from your initial loan rate. Refinancing can help secure a lower rate, especially in the context of declining interest rates, and save money.

Rehypothecation: How to Calculate the Amount You Can Borrow?

Rehypothecation allows you to borrow up to 80% of your property’s market value, taking into account the remaining balance of your current mortgage. The more you pay off your mortgage, the greater the amount available for refinancing.

A Concrete Example:

Your property has a current market value of $450,000.

You have $200,000 left to repay on your current mortgage.
The maximum amount you can borrow is 80% of your property’s value:
$450,000 × 80% = $360,000
Subtracting your mortgage balance:
$360,000 – $200,000 = $160,000
You can borrow up to $160,000. In this case, your new total debt will be $360,000: $200,000 existing balance + $160,000 new loan.

5 Reasons to Rehypothecate Your Home

There are several reasons why you might consider rehypothecating your property:

1. Get a Mortgage with a Lower Interest Rate

One significant advantage of rehypothecation is the potential to secure a lower interest rate on your total mortgage debt. With declining interest rates, refinancing your existing loan allows you to lower your monthly payments and reduce the total loan cost over time.

For example, if you took out your original mortgage three years ago at a 5% interest rate and current rates drop to 4%, refinancing allows you to take advantage of the lower rate on the new mortgage loan, leading to significant long-term savings. Even though interest rates fluctuate, rehypothecation can be a smart move if your current rate is significantly higher than the current available rate.

2. Finance Home Renovations

If you want to modernize your kitchen, expand your bathroom, or undertake major home repairs, mortgage refinancing can provide the necessary funds. Choosing a renovation loan through rehypothecation benefits you with a typically lower interest rate than a credit card, personal loan, or personal line of credit.

For example, instead of taking out a high-interest personal loan to replace your roof, you can refinance your mortgage to include the renovation costs. This way, you benefit from a lower mortgage rate and a longer repayment period. These renovations can also increase your home’s value, providing an additional advantage.

3. Invest in New Projects

The funds obtained through rehypothecation can also be used for investments or to purchase a rental property. However, discussing your investment strategies with mortgage brokers to evaluate available options and understand the financial implications is advisable.

Similarly, if you dream of acquiring a second home, rehypothecating your primary residence can provide the necessary down payment. This makes it easier to secure a second mortgage in addition to your initial loan.

4. Improve Your Financial Situation

Rehypothecation can also be an effective solution for debt consolidation. If you have accumulated high-interest debts, such as credit card balances or personal loans, you can use the funds from your mortgage refinancing to pay them off.

The main advantage is reducing your overall monthly payments and potentially saving on interest, thanks to the generally lower mortgage rate. This solution can simplify your financial management by consolidating multiple debts into a single mortgage payment.

5. Access Your Home Equity

Rehypothecation is also a way to access the home equity you have built in your property. Home equity represents the difference between your home’s market value and the remaining balance on your mortgage. This equity grows as you repay your loan, and your property’s value appreciates.

Refinancing allows you to borrow up to 80% of your home’s market value, subtracting your current mortgage balance.

For example, if your home is worth $400,000 and you still owe $150,000, you could potentially access:

($400,000 × 80%) – $150,000 = $170,000.

This amount of $170,000 can then be used for various projects.

Advantages and Disadvantages

Mortgage refinancing has benefits, but it also comes with risks:

Advantages

Potential savings on interest rates: If mortgage rates have decreased since your initial loan, you can benefit from lower monthly payments and save money in the long run.
Improvement of financial situation: Refinancing can free up funds for significant projects or major purchases by leveraging your home equity.
Reduction of monthly payments: Extending the amortization period can lower your monthly payments, making it easier to manage your budget.
Debt consolidation: Combining high-interest debts into your mortgage can simplify payments and reduce interest costs.
Property value enhancement: Investing in renovations through mortgage refinancing can increase your home’s value.
Access to home equity: Refinancing allows quick access to your home’s equity, providing greater financial flexibility.

Disadvantages

Extended repayment period: Although monthly payments may decrease, a more extended amortization period means you will pay more interest over the life of the loan.
Potential increase in mortgage balance: If you borrow more than your current mortgage balance, your total debt will rise.
Additional fees: Refinancing comes with notary fees, property appraisal fees, and potential early repayment penalties if you break your current mortgage contract.

Timeline and How to Prepare for Your Refinancing

The time required to obtain a mortgage refinance varies depending on the lender:

With a private lender, approval can be fast, sometimes within a few days.
With a traditional financial institution, the process may take several weeks.

In both cases, you must provide supporting documents proving your ability to handle the refinancing payments.

A professional will also assess the market value of your property to determine the amount you can borrow. Financial institutions will review several criteria before approving your application, including:

Your income and financial stability
Your debt level
The current value of your property

Good to Know: Consulting a mortgage broker can help you optimize your application and increase your chances of securing the best refinancing terms.

Alternatives to a Re-Mortgage: Explore Other Options

Mortgage refinancing is often considered to access the equity in your property and obtain cash. However, there are also other interesting alternatives, whether in case of a refinancing denial or to explore different financial strategies:

Home Equity Line of Credit: Flexibility and Quick Access to Funds

A home equity line of credit (HELOC) is a revolving loan that allows you to borrow funds up to a predetermined limit, using your home’s equity as collateral. You only borrow the amount you need and pay interest only. A HELOC offers excellent flexibility, as the funds are available at any time.

CHIP Reverse Mortgage: Accessing Home Equity for Seniors

A reverse mortgage, also known as the Canadian Home Income Plan (CHIP), is designed for homeowners aged 55 and older. This solution enables them to borrow against some of their home equity without selling their property. The loan amount and interest are repaid when the property is sold or upon the homeowner’s passing.

Conclusion

Mortgage refinancing is a way to obtain liquidity based on the market value of your home. This solution can help you finance home renovations or achieve a personal project. It also offers several benefits, such as reducing your interest rate in some instances. However, re-mortgaging also carries risks, so it is advisable to seek expert advice to make an informed decision and successfully implement your strategy.