Remortgaging a property can result in lower monthly payments and lowered interest rates. However, the process can be trickier than advertised. In the middle of the investment process, some borrowers can find themselves completely vulnerable when lenders don’t discuss the expenses.
Is refinancing the right path for your financial future? Before you can make up your mind, you need to take a step back and view the refinancing picture in its entirety. There are many sneaky fees associated with refinancing, and this article aims to help Ontarian homeowners uncover them.
Common Fees Associated with Refinancing
Regarding remortgaging, fees can accumulate before you even realize what is happening. Most commonly, these elevated costs relate to title insurance costs, administrative fees, and appraisal costs. An appraisal is a requisite to calculate the market value of your property. This allows lenders to decide if the property is worth enough for a new loan. These appraisal fees can be $300 to $500 in Ontario.
The cost of the administrative fees will always vary depending on the lender. These fees cover the cost of underwriting, any associated paperwork, and other internal affairs. Even though some lenders can offer fee waivers, looking over the fine print is crucial. This ensures that no sneaky, unexpected charges are appended later. A measure that is taken to avoid arguments about who owns a property is where title insurance comes into play. It is a mandatory fee that can add another hefty $250 to $400 to your expenses, but it is invaluable in the market.
Prepayment Penalties
The prepayment penalty is the weightiest hidden fee in refinancing. Ontario homeowners often ignore the fact that breaking their current mortgage in advance can result in steep costs. This penalty is calculated as the greater of three months’ interest or an Interest Rate Differential (IRD).
The IRD can be expensive. It considers the difference between your original interest rate and the current rate offered by your lender, multiplied by the remaining term on your mortgage. For fixed-rate mortgages, this penalty can amount to thousands of dollars. Homeowners with variable-rate mortgages usually face lower penalties, but confirming the exact amount before committing to refinancing is crucial.
Ontario-Specific Land Transfer Tax Implications
Refinancing your mortgage in Ontario can provoke tax implications for land transfer. This is even more true if the refinancing involves a massive alteration to the ownership of your estate. This could occur when your spouse is added or removed from the title during the refinancing process. This can cause the exchange to be considered a sale.
Land transfer taxes are determined based on the value of the home. The cost can be doubled in notable cities like Toronto if the municipal land transfer tax is applied. While not all refinancing scenarios lead to land transfer tax obligations, homeowners should clarify with their lawyer or lender whether their situation might be affected.
Legal Fees for Refinancing in Ontario
You can incur legal fees during the refinancing process, as it requires updated legal paperwork associated with your home. These fees cover the cost of a lawyer or notary evaluating and revising documents, registering the new mortgage, and performing title searches to guarantee no liens or claims are attached to the home.
In Ontario, all the legal fees associated with the refinancing process can range between $700 to $1,200. Lenders might even be willing to fund part of the legal fees as part of a promotion. These are mandatory costs to factor into your budget before refinancing.
Closing Costs Breakdown
Closing costs encompass a series of smaller fees associated with refinancing. These costs can include discharge fees for your previous mortgage, administrative costs for setting up a new loan, and courier fees for transferring documents.
Your former lender charges discharge fees to close out the previous mortgage, which can range from $200 to $500. Though these are paltry expenses compared to other costs, they can stack up when you ignore them. Homeowners should always ask their lender for a detailed estimate to avoid an unpleasant ambush at closing.
How Provincial Property Taxes Affect Refinancing
In Ontario, property taxes can also influence refinancing costs. During the refinancing process, homeowners must pay their property taxes in advance. This becomes even more important if the borrower has late (or wholly missed) payments in the past. The result is that you might need to cover several months of taxes upfront before you will be able to secure your mortgage.
Lenders can also change the schedule for paying off property taxes when the borrower is setting up a mortgage, resulting in larger monthly payments. To avoid any disruptions to cash flow and budget accordingly, it is important to understand how your lender plans to handle property taxes.
Credit Score Impact
Refinancing your mortgage does inevitably result in an inquiry on your credit report. This can lower your credit score. Although this dip is short-term, it’s still worth considering if you plan to apply for any additional credits (such as a car loan or a line of credit).
Frequent refinancing within a short period can raise alarm bells for future lenders. It can signal the one thing that they hate most: instability. To prevent this, you must ensure that refinancing aligns with your long-term financial goals. You need to assess if the benefits outweigh the costs. One way to do this is to observe your credit score before and after refinancing since it can help you monitor any changes and improve your creditworthiness.
Making Informed Refinancing Decisions
Remortgaging can provide inarguable benefits. It’s essential to approach the process with eyes wide open. Three of the hidden costs – appraisal fees, legal expenses, and land transfer taxes – can result in a weighty impact on the overall savings you aim to achieve. Knowing these three potential expenses prepares you to decide whether refinancing is the best option for you.
By thoughtfully assessing the financial intimations, operating with seasoned professionals, and planning for both upfront and ongoing costs, homeowners in Ontario can reap the advantages of refinancing without being surprised by significant fees. Finally, it’s important to always remember that your two best tools for achieving long-term financial stability are awareness and preparation.
