02/12/2015 04:19 EST | Updated 04/14/2015 05:59 EDT

Is Now the Time To Refinance? Run The Numbers First

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With talk about interest rates lowering even further after the Bank of Canada's surprise announcement several weeks ago, many homeowners across B.C. are likely wondering if it's time to refinance their mortgage and take advantage of lower rates.

Many British Columbians pay more in housing costs than other Canadians, so a refinance has definite appeal for them. Also, in Northern B.C. or parts of the Okanagan, home values are not as strong as the Lower Mainland, so a refinance may make sense if they don't want to sell their home at a loss.

If you're on a variable rate mortgage, then you may not need to refinance to get a lower rate, because your rate is based on the lender's prime rate and all lenders have now reduced prime. If you had other reasons for wanting to refinance -- say, to consolidate debt and increase overall cash flow -- and decided to move ahead, you may be subject to prepayment penalties for refinancing outside of when your term ends. Penalties would also apply to fixed-rate mortgages.

Typically, for a variable-rate mortgage, the prepayment penalty will be equal to three months' worth of interest; for a fixed-rate mortgage, it would be the interest rate differential (the difference between your current mortgage rate and the rate that your lender could currently charge by re-lending funds for the remaining term of your mortgage).

If the interest rate savings on a refinance outweigh the cost of the prepayment penalty, then it might be worth pursuing a refinance. (Also keep in mind that you'd need to have built up at least 20 per cent equity as you can only refinance up to 80 per cent of the value of the home.) If you don't have the cash now to cover prepayment penalties, you can roll that cost into your mortgage balance and reap the savings of a lower interest rate.

However, if the prepayment penalty will cost more than the amount you'd save on interest, then you're better off finishing out your mortgage term and shopping for a better rate at renewal. With any big bank or credit union, the IRD is usually a complex calculation. They do have online calculators, but these tools are not always accurate, so you may want to run the numbers with a mortgage broker.

Refinances can work if you are close to the end of your term and want to get a great rate that is available now, if you are on a variable term and your penalty is three months' interest, or if your interest rate is simply high (perhaps at the time you took out the loan, you had some credit issues that you've since cleared up and can now qualify for a better rate).

Refinancing with different lender at renewal makes sense because there is no penalty, and you might get a better rate that way. There is no right or wrong answer, because you really have to crunch the numbers. Always look not just at your savings in your mortgage payment, but also at the outstanding balance at the end of the term. And if cash flow it currently tight, you need to look at your budget and determine what you can realistically afford.