There has been a fair amount of talk recently about the historically low interest rates in Canada, and how this affects major purchases, like buying a home. This past spring, as the country was opening back up after the COVID-19 first-wave lockdown the Bank of Canada cut interest rates to help give the economy a boost post-lockdown.
You might be wondering what a lower interest rate means for the average home buyer – especially if you aren’t currently in the market for a new home. I reached out to friend of The Tulip Team; Cathy McDonald, at Mortgage Brokers Ottawa, to ask her what this means for homeowners in the Ottawa area.
Cathy says that “With historically low mortgage interest rates and rising home values, now is a great time to consider your options for refinancing to get a lower interest rate and unlock some equity. If you’ve been thinking about investing in a rental property, renovating, or consolidating debts, you may be able to increase your mortgage without a significant increase to your mortgage payment. Current interest rates are at around 2% or lower so whether your mortgage is coming up for renewal soon or not for a while, it’s worth checking on your options.
You can refinance up to 80% of the current value of your home. For example, if you purchased your home for $350k a few years ago and the current value is $550k, you could increase your mortgage up to $440k, potentially giving you $100k+. Consolidating debts with higher interest rates will save on interest and also free up some cash flow. If you use the funds towards the purchase of an investment property, the interest is tax deductible on the amount use for the investment property down payment.
If your mortgage isn’t up for renewal soon, you’ll need to check with your lender to determine if you can break your mortgage early and how much the penalty will be. Penalties vary a lot and can be as low as 3 months of interest or much higher. Working through the numbers is the next step to calculate your interest savings and whether it makes sense to break the mortgage now or wait. Your mortgage broker can help with this, and go through the numbers and options with you. If the penalty is high, you can consider options to access your equity without paying the penalty. Some lenders offer an option for a blended rate, where you don’t pay the penalty, but you only effectively get the new lower rate on the new funds. There is also the option of leaving your mortgage as is, and adding a Home Equity Line of Credit which gives you the flexibility of accessing funds now or down the road.”