Guide to Refinancing a Mortgage in Ontario
To refinance a mortgage in Ontario, you’ll break your current mortgage agreement and sign a new one based on current mortgage rates.
Refinancing can be a way to get better terms or a lower rate, but consider the pros and cons before moving forward.
How refinancing a mortgage in Ontario works
Refinancing a mortgage in Ontario is similar to refinancing in other Canadian provinces and territories. However, mortgage types, financial institution availability and fees may vary by region.
When you refinance, you replace your existing home loan with a new one. Ideally, your new mortgage agreement offers you more favourable interest rates, loan terms or monthly payments.
You’ll be subject to the same qualification requirements you went through when you applied for your original mortgage. This includes repeating the mortgage stress test, providing information about your income, calculating your debt service ratios and having your credit checked. Refinancing a mortgage likely also means paying additional expenses like appraisal and legal fees.
When refinancing a mortgage in Ontario, you don’t have to stay with the same lender who provided your original mortgage. You are free to shop around to find the lender with the best rates and terms. But keep in mind that if you leave your lender, you may be charged additional costs like a discharge fee.
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3 reasons to refinance a mortgage
Reduce your interest rate. If interest rates have dropped since you got your original mortgage, refinancing at a lower rate can lower your monthly payments and overall interest costs.
Secure a longer amortization period. To cope with unmanageable mortgage payments, you might refinance to extend your amortization period, which will create smaller monthly payments.
Turn home equity into cash. You can use the funds to cover expenses like home improvements, debt consolidation, education expenses or other costs.
How much can you borrow by refinancing in Ontario?
When refinancing a mortgage, you can borrow as much as 80% of your home’s appraised value. Keep in mind that any balance remaining on your previous mortgage will be deducted from that amount.
For example, say your home is appraised at $600,000 and you owe $350,000 on your existing mortgage. Here’s how much you’ll be able to borrow:
80% of the appraised value: 0.80 x $600,000 = $480,000
Mortgage balance remaining: $350,000
Maximum refinance amount: $130,000 ($480,000-$350,000)
The cost of refinancing a mortgage
A mortgage refinance comes with numerous costs, which can add thousands or even tens of thousands of dollars to your bill. Before deciding to refinance, make sure you’re aware of the expenses, including:
Legal fees: You may need a lawyer to help with the paperwork.
Home appraisal fees: Because the value of your home will have changed since you first applied for a mortgage, you’ll likely be required to get an updated appraisal.
Mortgage discharge fee: If you refinance with a different lender, your original lender will charge this fee.
Mortgage registration fee: This fee depends on your province and method of registration, but is usually $70 to $80 in Ontario.
Mortgage prepayment penalty: Prepayment penalties can be the highest costs of a refinance. They are usually equal to three months’ interest on your remaining balance or the interest rate differential — whichever is higher.
How to get the best mortgage refinance rates in Ontario
The best way to ensure you’re getting the best possible mortgage refinance rates in Ontario is to shop around and get quotes from multiple lenders. You can contact your current lender, speak with a local mortgage broker or request quotes online.
Just be sure to compare details like interest rates, closing costs and other fees so you know you’re comparing apples to apples, and read the fine print before signing on with any lender.
When to refinance your mortgage
The best time to refinance a mortgage depends on your individual needs, your financial goals and the mortgage market conditions.
It’s generally ideal to wait until near the end of your current mortgage term so you won’t have to pay such high prepayment penalties, which can be the most costly aspect of a refinance.
But refinancing can still be the right choice if the money saved on interest outweighs the prepayment penalties. Refinancing might also be a good choice if it helps you access funds to pay off higher-interest debt, such as credit card balances.
Pros and cons of refinancing a mortgage
Pros
- Switching to a lower interest rate could save you thousands of dollars over the life of your mortgage.
- Accessing a large amount of money could help you fund a large project like a home renovation.
- Extending your mortgage amortization period could help you lower your monthly mortgage payments and make your loan more manageable.
Cons
- May incur a costly prepayment penalty, as well as other fees, if you refinance before your current mortgage contract ends.
- Requires you to go through the mortgage process again (like the stress test and have your home appraised)
- Could result in paying more interest overall if you extend your amortization period.
Alternatives to refinancing a mortgage in Ontario
If you decide refinancing isn’t right for you, there are a few other options to consider, including:
A blended mortgage. Some lenders allow you to blend your existing mortgage’s interest rate with a lower one, thus avoiding the costs associated with refinancing.
A HELOC. With a home equity line of credit, you can generally access up to 65% of your home’s equity. You only pay interest on the amount you withdraw.
A home equity loan. Essentially another mortgage on top of your current one. There are no prepayment penalties to worry about, but home equity loans typically come with higher interest rates than refinances or HELOCs.
Frequently asked questions
What are the rules to refinance a mortgage in Ontario?
What are the rules to refinance a mortgage in Ontario?
The main rule is that you can only access 80% of your home’s value, which will be determined by a new appraisal. Furthermore, any remaining balance you have on an existing mortgage will also be deducted from the total amount of equity you can access by refinancing. Finally, refinancing comes with a number of costs, including a prepayment penalty if you’re refinancing before the end of your current mortgage term.
Does refinancing hurt your credit?
Does refinancing hurt your credit?
Refinancing may temporarily hurt your credit for two main reasons. Closing your original mortgage account may shorten the overall average length of your credit history, which could negatively impact your score. In addition, if your lender does a hard check on your credit file, it may temporarily result in a decreased score.
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Clay Jarvis
Clay Jarvis