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Highlights
- If interest rates are rising, refinancing an adjustable-rate mortgage may make sense
- Refinancing comes with costs and lengthy and time-consuming paperwork
- To earn extra money to undertake spending, investment in blue-chip stocks can be a good idea
Refinancing a mortgage loan has been made to appear as an attractive proposition by lenders and analysts.
In a nutshell, it is like luring the customer of a competitor by offering a little extra discount on the same good.
Borrowers indeed sometime benefit from these competitive forces by obtaining a mortgage with a lower interest rate to replace the earlier one. However, unless there are tangible benefits that will accrue to you, there is little justification for refinancing the mortgage, considering it involves lengthy paperwork and application fee.
Also read: 3 Canadian crypto stocks to add to your portfolio in 2021
When should you refinance
A tangible benefit that can be a compelling reason to refinance an adjustable-rate mortgage (ARM) is that policy interest rates are likely to go north in the near-to-medium term.
Today, rates are sitting at record low levels and the adjustable-rate mortgage hasn't yet started to take a toll on the borrowers' finances. Rising prices of food, clothing and now energy can likely compel the Fed, the Bank of Canada and other central banks to hike benchmark rates earlier-than-expected. The government's debt overshooting permissible limits can add fuel to fire.
The Bank of Canada has recently ended its bond purchases, which is being considered by many as a sign that interest rate hikes may be around the corner.
Liquidity from the market might be sucked soon through fiscal and monetary policy measures. And that could be a sign for you to refinance the adjustable-rate mortgage with a fixed-rate loan. Besides, this fixed rate loan can give you the exact idea of your medium-to-long term debt obligations, which is what you need during times of economic downturns like the ongoing one.
Also read: How are low interest rates helping Canada & US?
Also read: Top 3 Canadian energy stocks to buy under $60
When you shouldn’t refinance
Refinancing just because you need some extra credit can be a bad call. According to experts, refinancing a mortgage can cost anywhere between three to six per cent of the principal amount. Mortgage loans are always of a very high amount, and hence this cost of refinancing cannot be ignored.
It might be a good idea to invest small amounts of money in stocks with good fundamental and earn some extra bucks through capital gains and dividend income.
Also read: Is Canada working on its own CBDC?
Bottom line
Refinancing can be a prudent call when it brings tangible benefits. If interest rates are rising or are likely to rise in the future, replacing an adjustable-rate mortgage with a fixed-rate loan is a good idea. However, in cases when the motive of refinancing is only to get some extra room for spending, it might only lead to debt accumulation. Costs of refinancing must always be considered beforehand.
