For many Canadians, managing monthly mortgage payments can be challenging, especially when interest rates fluctuate or financial circumstances change. One strategy that homeowners may not be aware of is mortgage recasting. This process can reduce monthly payments without the need to refinance, saving time, effort, and money.
In this guide, we’ll explain what recasting a mortgage means, how it works in Canada, its benefits, and important considerations before pursuing this strategy.
What Is Mortgage Recasting?
Mortgage recasting is a process where your lender recalculates your monthly mortgage payments based on the current principal balance after a large lump-sum payment. Unlike refinancing, recasting a mortgage does not change your interest rate or loan term; instead, it reduces your monthly payment while keeping your original mortgage structure intact.
In simple terms, if you make a significant extra payment toward your principal, the lender can recast your mortgage so that your remaining balance is spread out over the remaining term, resulting in lower monthly payments.
How Does Recasting a Mortgage Work in Canada?
The process of recasting a mortgage in Canada typically involves the following steps:
- Make a Lump-Sum Payment: To qualify for a mortgage loan recast, you usually need to make a substantial payment toward your principal—often $5,000 or more, depending on the lender.
- Request a Mortgage Recast: Contact your lender to ask about their recasting process. Not all Canadian lenders offer mortgage recasting, so it’s essential to confirm eligibility and any fees.
- Lender Recalculates Your Monthly Payments: After the lump-sum payment is applied, the lender recalculates your monthly payments based on the new principal balance while keeping your original interest rate and loan term unchanged.
- Start Paying the Reduced Monthly Amount: Once the recast is processed, your monthly mortgage payments decrease, freeing up cash flow for other expenses or investments.
Benefits of Recasting a Mortgage
There are several reasons why Canadians may consider recasting mortgage payments instead of refinancing:
1. Lower Monthly Payments: The most immediate benefit is a reduction in monthly payments. By applying a lump-sum payment to your principal and recasting your mortgage, you reduce the amount owed and spread the balance over the remaining term, making payments more manageable.
2. Maintain Your Current Interest Rate: Unlike refinancing, which may involve securing a new interest rate, recasting a mortgage in Canada allows you to keep your existing rate. This can be advantageous if you have a lower rate than current market rates.
3. Avoid Closing Costs: Refinancing typically comes with fees, legal costs, and other charges. Recasting usually involves a small administrative fee, making it a cost-effective alternative.
4. Accelerate Principal Repayment: Even after reducing monthly payments, any extra payments you make continue to go directly toward the principal, helping you pay off your mortgage faster over time.
5. Flexibility for Financial Planning: By lowering monthly obligations, recasting can improve cash flow, allowing homeowners to save for retirement, invest, or handle other financial commitments.
Who Should Consider Recasting a Mortgage?
Not every homeowner will benefit from a mortgage recast. This strategy works best for those who:
- Have a lump sum of money available for a principal payment.
- Want to reduce monthly payments without refinancing.
- Are satisfied with their current interest rate
- Plan to stay in the home for a significant period to maximize benefits.
If you’re facing financial challenges or are considering refinancing to lower payments, recasting a mortgage in Canada may be a more straightforward, more cost-effective solution.
Important Considerations Before Recasting
Before proceeding with a mortgage loan recast, homeowners should consider the following:
1. Eligibility Requirements: Canadian lenders vary in their policies regarding recasting. Some may require a minimum principal payment, a specific loan type (e.g., conventional mortgages), or a specific time elapsed since the original mortgage started.
2. Fees and Costs: While recasting is generally cheaper than refinancing, there is usually an administrative fee. This can range from $100 to $500, depending on the lender.
3. Limited Availability: Not all lenders in Canada offer recasting. Check with your bank, credit union, or mortgage broker to confirm if it’s available for your mortgage.
4. Effect on Mortgage Term: While recasting a mortgage reduces monthly payments, it does not shorten the mortgage term unless you continue making higher payments. If your goal is to pay off your mortgage faster, you can combine recasting with extra principal payments.
How to Recast a Mortgage in Canada
- Contact Your Lender: Ask if your mortgage is eligible for a recast and understand the requirements and fees.
- Make a Lump-Sum Principal Payment: The larger the payment, the more your monthly payments will be reduced.
- Submit a Recast Request: Complete any forms required by your lender for a mortgage recast.
- Confirm the New Payment Schedule: Once processed, your lender will provide a revised payment schedule reflecting the reduced monthly payments.
- Continue Regular Payments: Stick to the new monthly payment plan, and consider making extra payments toward the principal to accelerate mortgage payoff further.
Final Thoughts
For homeowners looking to reduce monthly mortgage payments without the complexity and costs of refinancing, recasting a mortgage is a practical and efficient solution. By making a lump-sum payment and requesting a mortgage loan recast, homeowners can lower monthly obligations, maintain their current interest rate, and enjoy greater financial flexibility. If you’re interested in exploring your options, consult with our trusted mortgage professionals to determine if recasting a mortgage is the right strategy for your financial goals.