Refinancing a mortgage is paying off your current loan and entering into a brand new mortgage agreement. The goal is to get more favourable terms, like lower mortgage rates, or access to your home's equity.
To be eligible, homeowners are usually required to have paid off at least 20% of their mortgage. You'll also have to pay some penalty fees since paying off your current mortgage is technically a prepayment.
Here, we'll go over how to refinance your mortgage in Canada, plus the pros and cons of refinancing and some alternatives.
Key Takeaways
- Refinancing your mortgage is when you take out a new, usually lower-interest mortgage to pay off your current loan with the hopes of saving money.
- This can allow you to save on interest and monthly payments, and can also help you consolidate your debt.
- On the downside, refinancing your mortgage could result in hefty prepayment penalties as well as cause you to take longer to pay off your house.
Choose a type of mortgage refinancing
Refinancing is when you break your current mortgage to renegotiate a new mortgage, either with the same company or another company. The type of mortgage refinancing you select can affect your potential penalties and new terms.
- Rate and term refinance: You negotiate a new term and/or a new rate.
- Cash-out refinance: You borrow from your equity, increasing the overall amount you owe and withdrawing cash. This is limited to 80% of your appraised value.
- Debt consolidation refinance: Combine multiple debts into a single payment.
Mortgage renewal is different from mortgage refinancing. Renewing means signing a new contract with your current lender when your existing contract expires, with new terms. Renewing is often easier than refinancing, which includes more significant changes to your agreement.
The ideal time to consider refinancing is when you're already near the end of your mortgage term.
Evaluate available mortgage terms and lenders
You need to consider these key features of each lender:
- Interest rates: Lower rates help you save more money
- Interest type: Fixed rates give you more predictability
- Term: This is the amount of time left on your mortgage
- Payment options: Look for flexibility (bi-weekly vs. monthly)
- Fees: Ask about legal, appraisal, and admin fees
- Reputation: Some lenders are well-established with high customer ratings
Some lenders have special features like allowing portability (moving a mortgage to new property), no-penalty prepayment, skip-a-payment, and convertible mortgages.
Right now, the prime rate in Canada is fairly high at 4.7%, so make sure whatever mortgage you're interested in has a lower rate than your current mortgage.
Shop around at the big banks, but also remember to check out smaller credit unions and online banks, as they sometimes offer very competitive rates. A mortgage broker can be a huge help with this.
Calculate the cost of refinancing your mortgage
Here’s an example that can help you think through the costs of refinancing:
Let’s say you own a $650,000 property with $450,000 left on the mortgage. You currently have a fixed 3.5% interest rate and you’re refinancing to a 2.5% interest rate with 20 years left.
Prepayment penalties: $500 - $10,000
Penalties can be either three months’ interest or the interest rate differential (IRD), whichever is higher. If you have a large loan or a high interest rate, your prepayment penalty could be very high. Fixed-rate mortgages usually have higher prepayment penalties than variable-rate mortgages.
- If based on interest: 3.5% / 12 * $450,000 * 3 months = $3,937.50
- If based on IRD: (3.5%−2.5%) * $450,000 * 20/12 = $7,500
Closing costs: 2- 4% of your new mortgage amount
These costs may include legal fees, appraisal fees, administrative fees, title insurance, and possibly land transfer tax and mortgage default insurance (CMHC) if the loan exceeds 80% loan-to-value (LTV).
- Legal fees: $2,000
- Appraisal fees: $400
- Title insurance: $500
- Land transfer tax: $9,475
- Total = $12,375 (2.75% of your new mortgage amount)
If the amount you're refinancing is over $200,000, many mortgage brokers and lenders may cover the appraisal costs and legal fees.
The prepayment penalty can change depending on which bank you're with, so try the CIBC mortgage prepayment calculator to get an estimate.
Apply for mortgage refinancing in Canada
Applying may require additional documentation beyond what you submitted for the original mortgage.
Firstly, you must pass the stress test to convince lenders you can afford to refinance.
Borrowers have to be approved for a rate of either the interest rate they were approved for by their lender plus 2%, or 5.25% (the minimum qualifying rate), whichever is higher.
Next, you’ll share the following:
- Credit score and credit history
- Debt-to-income ratio
- Employment
- Type of property
- Reason for refinancing.
Each financial institution has its own application form but it’s normal to submit this data for evaluation.
If you're approved, review the new offer carefully. After the new agreement is signed, then you can submit paperwork to break your previous contract. Sometimes your new lender will help you with this process.
Pros and cons of refinancing a mortgage
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Alternatives to refinancing a mortgage
If you’re interested in a better rate or access to cash, there are a few alternatives to refinancing.
- HELOC (Home Equity Line Of Credit): This may be an option for people with 20% or more equity. You borrow against your home's value with a revolving credit line, as needed and repeatedly. Good for homeowners who need flexible access to funds for expenses like renovations or emergencies.
- Home equity loan: This is a lump sum loan taken from your home equity. It has a fixed interest rate and repayment schedule. Good for people who prefer predictable payments and need a substantial amount of money upfront for a major expense.
- Blended mortgage (or blend-and-extend): This blends your existing mortgage rate with the current market rate. You may be able to do this when refinancing or extending your mortgage term. Good for homeowners looking to secure a more favourable interest rate while maintaining their existing mortgage terms and avoiding penalties.
- Porting: If you’re moving to a new property, some lenders allow you to transfer an existing mortgage to a new property at the same terms while avoiding penalties. Good for individuals who want to keep their current mortgage rate and terms while relocating to a new home.
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Financially speaking, it makes sense to refinance if you can find better interest rates or if you need cash to fund major projects or pay off debt. Volatile interest rates on variable mortgages are a big motivator for Canadians who choose to refinance and switch mortgage types to a fixed rate.
Refinance if interest rates drop: Refinancing can help homeowners benefit from falling interest rates. This puts you in a more stable financial position for the future.
Refinance to switch mortgage types: A variable interest rate means unpredictability. If you can qualify for a fixed-rate mortgage that fits your budget, refinancing could be a good choice.
Refinance to access equity: You’ve already paid off some of your home loan, but Canadian regulations allow you to refinance up to 80% of your home’s value. You can use cash-out refinancing to fund home improvements, pay off debt, or tackle other major expenses
FAQ
What does it mean to refinance my house?
Refinancing your house, also called refinancing your mortgage, is when you pay off your current mortgage with a new mortgage. Typically, the new mortgage has more favourable terms (like a lower interest rate), but not always.
What are the pros of mortgage refinancing?
When done right, mortgage refinancing can save you a lot of money by lowering interest rates. It can also give you access to your home's equity so you can use it as a low-interest loan or as debt consolidation.
What are the risks of refinancing my home?
The major risk of refinancing your home is the prepayment penalty. If big enough, it could nullify any savings you make by lowering your interest rate or set you back in terms of your amortization period and overall home equity.
How do I refinance my mortgage?
To refinance your mortgage, you need to break your old contract and apply for a new one. You'll need to have at least 20% of your mortgage paid off and may have to pay a prepayment penalty.
How much does it cost to refinance my mortgage?
This depends on several factors, including your current mortgage and your lender. Check to see if your current lender has a mortgage refinance calculator and use it to get an estimate on any penalties you'll need to pay.
When can I refinance my home?
The right time to refinance is different for everyone. You usually have to wait until you have 20% equity in your home to refinance it, but speaking with a mortgage advisor can provide you with more information and guidance.
What’s the downside to refinancing?
Refinancing can extend the length of time you’re making mortgage payments. You have to be very sure you can afford to put yourself into additional debt for more years, otherwise you could end up stuck with high payments into retirement.
How much equity do you need to refinance?
You need at least 20% equity in your home to do a cash-out refinance in Canada. If you don't meet this requirement, a few alternatives include HELOCs, home equity loans, blended mortgages, and porting your mortgage.
What is refinancing a mortgage?
Refinancing a mortgage is when you sign a new mortgage agreement with different terms. Usually, it’s with a better interest rate or to pull out cash from your equity. You have to break your old agreement to refinance.
Is it ever a good idea to refinance?
Refinancing can be a good idea if you need access to funds for unexpected expenses. It can also help you consolidate higher-interest debts into a single monthly payment. Assess your financial situation carefully to make sure you can afford it.
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