Reason #2 to Refinance: Lower My Payments
In last week’s blog post, we looked at the first reason you might refinance: consolidate debt. Consolidating debt is a good reason you might consider refinancing your mortgage, but that’s not the only reason. In this week’s blog, we’re going to look at a second good reason: lower your payments.
What is Cash Flow and Why Does it Matter?
Cash flow in the inflow and outflow of money on a monthly basis. The inflow of money comes from money that you earn from working and other sources like investments. The outflow of money is stuff that you spend your money on. The biggest expenses for most Canadian families include taxes, transportation and, of course, we don’t want to forget real estate, our homes.
The mortgage stress test is supposed to protect us from taking on too much debt. It’s supposed to ensure we can handle higher mortgage rates if and when they arrive, but there’s a major flaw. It doesn’t account for other major household expenses like groceries and child care. And neither of those household expenses comes cheap. You could easily be spending more than $2,000 a month on them together. That’s like a mortgage payment on its own. Ouch!
Most Canadians sign up for a five-year mortgage term. Five years provides you with stability if you sign up for a fixed-rate mortgage, again like most Canadians. However, a lot can happen in five years. You could get married, start a family or both. A mortgage payment that could have been affordable when you first signed up for your mortgage may no longer be affordable now with these added expenses.
How Do Mortgage Payment Work?
Mortgage payments are based on several factors, including the mortgage rate and amortization period. Most of us know what the mortgage rate is. It’s what we’re all so focused on when signing up for a mortgage. However, fewer of us are familiar with what an amortization period is.
The amortization period is the length of time it would take you to pay off your mortgage in full, assuming you’re making regular payments. Of course, most mortgages let you make some extra payments. You can reduce your amortization period by making those extra payments. Many Canadians like prepayments, but few of us actually take advantage of them.
When you sign up for a mortgage, you’re usually offered a 25 year or 30-year amortization. Still, nothing stops you from going with a shorter amortization period (as long as you can qualify for it). A shorter amortization period means paying off your mortgage that much sooner due to a higher payment. While that sounds good in theory, not everyone what’s a higher payment. Sometimes you can reduce your mortgage payment.
Lowering Your Mortgage Payment
The simplest way to lower your mortgage payment is by refinancing your mortgage. You can do that by finding a lower mortgage rate and/or stretching out your amortization period. By doing those two things, you’ll lower your regular mortgage payment, making your mortgage more affordable.
Sure, it will mean paying more interest over the life of your mortgage. However, lower your mortgage payments can make sense if you’re going through an expensive period of your life, such as the birth of a new child. You can always catch up on the payments you would have made later on once your cash flow improves again.
The Bottom Line
Not sure whether it’s worth it to refinance your mortgage to lower your payments? Speak with one of our experts to run for the numbers for you to see if it would be beneficial.