Refinancing a Mortgage in Canada
A mortgage refinance involves breaking your existing mortgage contract and paying the balance in full with a new loan. This new mortgage comes with its own terms, conditions, and interest rate.
Refinancing can turn home equity into cash or help you score a lower mortgage rate. It pays — quite literally — to know all you can about refinancing a home loan before starting the process with your lender.
How refinancing works
Refinancing is similar to applying for a mortgage. Your income, debt service ratios and credit history will be evaluated again, and you’ll need to provide similar documentation. This can include:
Identification.
Proof of employment and income.
Details regarding your assets, savings and debts.
Tax documents.
You’ll also need a home appraisal to determine your property’s current value and undergo another mortgage stress test.
How much can you borrow in a mortgage refinance?
The amount you can borrow when refinancing is determined by how much home equity you have.
You can typically borrow up to 80% of the appraised value of your home when refinancing, but you’ll have to use a portion of what you borrow to pay off your current mortgage balance. What’s left over can be spent however you like.
Here's a quick example:
Home’s appraised value: $500,000.
Maximum refinance amount: $400,000. ($500,000 x 0.8)
Current mortgage balance: $350,000.
Maximum equity take-out: $50,000 ($400,000 - $350,000).
What can a mortgage refinance cost you?
If you’re considering a mortgage refinance, be sure to budget for all the possible costs involved. A refinance might require paying:
Legal fees.
Title search and title insurance fees.
Home appraisal fees.
Mortgage discharge fees (if you change lenders).
When you add in prepayment penalties, a refinance could cost you thousands of dollars in upfront charges. You’ll also have to consider the extra interest you’ll pay if you extend your amortization.
Ready to refinance?
Compare current mortgage refinance rates from Canadian lenders to ensure you're getting the best deal when accessing your home equity.
3 reasons to refinance a mortgage
1. To secure a lower interest rate
If interest rates have fallen since you took out your home loan, refinancing can help you score a lower mortgage rate or new terms that might allow you to repay more of your mortgage ahead of schedule.
2. To lower your monthly payments
Refinancing can allow you to extend your amortization period, which results in lower monthly payments. If your current mortgage is no longer manageable, this is one way to lower your short-term costs.
3. To free up cash
A refinance also gives you the option of turning equity into cash, which can help you pay for major expenses or eliminate higher-interest debt.
When is the best time to refinance?
Refinancing your mortgage will provide the most benefit when:
Mortgage rates have fallen enough that the money you save will be greater than the prepayment penalty you’re charged.
You need money to make a major purchase or investment, or pay off debt, and the refinance rate is lower than what you’d be charged using a HELOC, credit card, personal loan or line of credit.
Ideally, you want to use your equity to strengthen your household finances. To determine if the time is right to refi, ask yourself (and your lender) the following questions:
What’s my existing mortgage rate versus current mortgage refinance rates?
What are the administrative costs and closing costs associated with refinancing this mortgage?
How will I benefit from using my equity?
How much is the penalty for breaking my mortgage?
Is there a better way to pay for a major purchase?
Reducing prepayment penalties when refinancing
Paying off your mortgage early means incurring a prepayment penalty. To minimize this penalty, the ideal time to refinance is generally near the end of your mortgage term.
The less time there is left on your mortgage term, the less your lender will charge in prepayment penalties.
When refinancing, do some comparison shopping to ensure you’re getting the best rate, terms and conditions. It's generally an opportune time to tag in a mortgage broker, who will have access to a greater number of refinance offers than a bank.
Is a mortgage refinance right for you?
Refinancing can provide a significant boost to your household finances if:
Pulling out equity can help you pay down debt or make a major investment, like a second home or post-secondary education.
It helps you obtain a lower interest rate and immediately improves your cash flow.
You have an unaffordable variable-rate mortgage and want to switch to a fixed rate.
But there are instances where refinancing may not be the best move.
If prepayment penalties will devour a significant portion of the proceeds, for example, you might be better off waiting until the end of your term and seeking out a better deal when you renew your mortgage.
If you refinance to extend your amortization period, you might secure lower payments, but you’ll be paying interest for several additional years and adding thousands of dollars to the cost of your mortgage.
Pros and cons of refinancing a mortgage
Pros
- Saving money by getting a lower interest rate.
- Freeing up cash flow by arranging smaller monthly mortgage payments.
- Accessing funds that can be used on major purchases or debt consolidation.
Cons
- Winding up with a longer mortgage.
- Having to pay penalties or other fees.
- Paying a higher interest rate than if you waited to renew.
Alternatives to mortgage refinancing
What it is | Pros | Cons | |
|---|---|---|---|
Extending your existing mortgage contract by blending a new, lower interest rate with your current rate. | You can take access falling rates without breaking your mortgage and paying prepayment penalties. | Not always an option. If you extend your term longer than you stay in your home you’ll pay prepayment penalties. | |
A secured, revolving credit line that allows you to borrow up to 65% of your home’s market value if you have at least 20% equity. | No need to break your mortgage. Application process can be shorter if you’re dealing with a familiar lender. | You must pass a stress test. HELOC rates are generally higher than refinance rates. | |
A second mortgage typically offered by non-chartered banks or private lenders. | No prepayment penalties. Many providers to choose from. No mortgage stress test. | Rates can be significantly higher than with a refinance or HELOC. Borrowing from a private lender carries unique risks. |
Frequently asked questions
What are the downsides of refinancing a mortgage?
What are the downsides of refinancing a mortgage?
If a mortgage refinance involves extending your amortization period, you’ll be paying interest on your mortgage for several additional years. Breaking your mortgage early to refinance can result in hefty prepayment penalties.
Does refinancing a mortgage hurt your credit?
Does refinancing a mortgage hurt your credit?
A mortgage refinance can negatively impact your credit. You’ll undergo a hard credit check, which will lower your credit score temporarily. Closing a mortgage and replacing it with a new one may reduce the overall length of your credit history, which can also impact your credit score.
Can you refinance a mortgage multiple times?
Can you refinance a mortgage multiple times?
There is no limit on the number of times you can refinance a mortgage in Canada.
What does it mean to refinance a mortgage?
What does it mean to refinance a mortgage?
Refinancing a mortgage involves breaking your current mortgage contract so you can sign a new, more beneficial one. You might refinance to get a lower mortgage rate or to turn your home equity into liquid cash.
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