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Mortgage refinancing in Canada
Learn how to refinance your mortgage to secure lower interest rates or better terms for your home loan.
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Do you want to secure better rates for your mortgage or free up the equity in your home? If so, you could benefit from refinancing your mortgage. While it might sound complicated, mortgage refinancing is simply the process of getting a new mortgage agreement to replace your old one. Find out more about how mortgage refinancing works and compare lenders to find the best option for your unique set of needs and budget.
What is mortgage refinancing?
Mortgage refinancing involves replacing your existing mortgage with a new mortgage. This new mortgage typically comes with better rates or terms, or allows you to increase the amount of your mortgage so that you can take a portion of your new loan out as cash. This type of financing gives you lower rates than what you’d pay with an unsecured personal loan.
You may want to consider mortgage refinancing in a number of situations. These can include if interest rates in Canada go down, your credit score increases, you want to switch from a variable to a fixed rate or you’d like access to low-interest financing that’s secured by the equity in your home.
How much can I save by refinancing my mortgage?
The amount you can save by refinancing your mortgage will depend on what kind of deal you can work out with your lender. If you’re able to lock in a lower interest rate than you currently pay, you could stand to save hundreds or even thousands of dollars. Just keep in mind that these savings may be offset by additional fees you’ll have to pay to refinance. This is why it’s important to make sure refinancing is worth it before you look for a new loan contract.
Example of mortgage refinancing costs
Let’s look at what can happen when you refinance your mortgage using an example. Let’s say that when you first purchase your property, you sign onto a 30-year $550,000 mortgage with an average variable rate of 3.10%. With this loan agreement, you’ll have to pay $2,343 per month for the next 30 years to pay off your mortgage.
After five years, your credit score improves and you go to a new lender to get a better rate. This lender offers you a 2.74% interest rate on your mortgage. At this point, you have around $409,440 left owing on your mortgage, which you choose to finance over 25 years. Refinancing your mortgage with this new lender will bring your payments down to $1,883 per month.
Just keep in mind that you could end up paying between 2% and 6% of your total outstanding mortgage to refinance (which would equal between $8,189 and $24,566 in this example). At this point, you might want to calculate how much you would save by getting reduced payments. You can do this by making a table like the one below.
Loan Amount
Interest
Monthly Payment
Current Mortgage
$550,000
3.10%
$2,343
Refinance after 5 years
$409,440
2.74%
$1,883
Refinance Difference
N/A
0.36%
$406
In this example, you would save around $27,600 on a 5-year term, so it could make sense to refinance. If you get the same low rate for every 5-year term remaining on your loan, you could end up saving $138,000 on the cost of your loan over its 25 year amortization period. Find out more about mortgage interest rates to see how they affect your overall costs.
What if I want to borrow money using the equity in my home?
If you want to borrow money by refinancing your mortgage, you can apply for cash-out refinancing. This type of mortgage refinancing lets you borrow against the equity in your home. For example, let’s say you pay your mortgage down from $550,000 to $409,440 over the course of 5 years (as in the example above). This gives you a home equity of $140,560, or maybe even more if the value of your home has increased over time.
When you refinance your mortgage again, you might request cash-out refinancing to use this equity as collateral to finance a loan that you will take out in addition to your mortgage. For example, you might like to add an extra $50,000 to your mortgage when you refinance, leaving you with a total mortgage balance of $459,440 plus $50,000 cash in your pocket. You’ll also have to pay closing costs in this scenario, which can add up to between 2% and 6% of your total mortgage.
How to compare lenders when refinancing
Consider the following factors when you’re comparing lenders to find the best fit for your needs:
Interest rates. Compare the interest rates on offer to find the lowest rates for your personal situation.
Fees. Consider the fees you’ll have to pay to close your mortgage before you sign up as these can sometimes amount to 2% to 6% of your total loan amount.
Term length. Look for a term length that lets you refinance your mortgage with monthly payments you can afford.
Customer service. Search for a lender that has a solid reputation for offering high-quality customer service, even if this means accepting slightly higher rates.
Refinancing your mortgage can be a good way to save money. But factors like your current mortgage terms, the state of the economy and your personal financial situation should all be considered when deciding if it’s the right move for you. Here are 6 reasons why you should consider refinancing your mortgage:
1. To lower your interest rate
Getting a lower interest rate is one of the biggest reasons you should refinance your mortgage. Let’s say you get a mortgage for $380,000, amortized over 25-years with a fixed-rate of 3.5%. Your monthly payment would be approximately $1,897.23. But if you lower the interest rate by 0.7% to 2.8%, the monthly payment would fall to about $1,759.56 — assuming the financial health and credit history of the borrower remains the same. In this example, a 0.7% drop in the interest rate would yield roughly $1,652.04 in savings per year, and a total savings of $41,298.89 in interest over the life of the mortgage.Consider refinancing your mortgage to lock in a lower interest rate if your personal finances, including credit history and income, are better than when you first took out your mortgage.
2. To shorten the loan amortization period
Shortening the amortization period of a mortgage is another reason it might be worth exploring mortgage refinancing options. When you shorten your amortization period, you commit to paying off your mortgage earlier, which means you’ll be paying less interest over time. For example, during the first 10 years of a 25-year mortgage, the bulk of a mortgage holder’s payments go towards paying interest. For example, on a home valued at $380,000, moving from a 25-year fixed-rate mortgage to a 15-year fixed-rate mortgage with a 3% interest rate would increase monthly payments from $1,798.33 to $2,620.82. While securing a shorter amortization period increases your monthly repayments, you’ll save thousands of dollars in interest over the life of the mortgage.
3. To switch mortgage types (variable vs. fixed rate)
Switching between a variable and fixed rate mortgage can help you lock in the best interest rate depending on how the prime interest rate fluctuates.
Switching to variable rate. A variable rate mortgage has an interest rate that can change throughout the life of your loan term. Variable rates fluctuate based on the prime rate, and is usually expressed as the prime rate + or – a percentage set by your lender. Because the interest rate fluctuates based on the economy and other factors, your monthly payments will change over time – for better or for worse. Because of that uncertainty, variable rate mortgages are riskier than fixed rate, but could potentially save you a bundle of money throughout the life of your mortgage. Consider switching to a variable rate to benefit from a low prime rate, and if you’re comfortable paying more when rates increase. Variable rate mortgage guide
Switching to fixed rate. A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. So you won’t be impacted by fluctuations in the economy and your monthly payments stay the same from month to month. This is the most common type of mortgage in Canada, and is ideal for risk-averse homeowners. While a fixed rates mortgage protects you from interest rate hikes, you won’t benefit when rates are lowered. Since variable rate mortgages tend to have more competitive interest rates for the first few years of a mortgage, some mortgage holder’s will refinance from a variable to a fixed-rate to take advantage of lower interest rates later on. Fixed rate mortgage guide
Other types of mortgages that you should consider refinancing to or from include open and closed mortgages, convertible mortgages, hybrid mortgages and adjustable mortgages.
4. To access equity in your home
If you’ve built up some equity in your home and you’re looking to access it – either through a home equity loan or a home equity line of credit – you could refinance your mortgage in order to gain access to some cash. This type of refinancing technically won’t save you money – unless you’re going to use the money for an investment or income-producing purpose and make more than you’ll now have to repay in interest charges over your new longer loan term. For example, doing renovations on a rental property can have tax-saving benefits which could offset any extra interest you’ll pay on your new, higher mortgage.
Much like accessing equity in your home, you could use the funds from refinancing your mortgage to consolidate debts and pay off higher cost debts. While again you’ll have to pay more interest on your mortgage, the rate could be lower than on other debts – which ultimately will end up saving you money in the long run. However, it’s important to be aware of the potential debt trap here. Often, people who have racked up a lot of debt in areas like credit cards, payday loans or car loans will end up going into debt again because they have the available credit after paying down their debt from refinancing. If your spending habits don’t change, you could end up with more debt then what you owed before you refinanced your mortgage.
6. Because your loan term is ending
Your mortgage loan term is the number of months or years that you have your interest rate locked in for. Loan terms typically last anywhere from 6 months to 10 years, with most homeowners settling on a 2-5 year term. Once your loan term ends, you’re required to refinance your mortgage and take on a new interest rate. While many homeowners refinance for a new rate with their current lender, you should shop around and compare your options – possibly scoring an even lower rate.
Should you refinance your mortgage? Compare mortgage refinancing lenders
Comparing your available options can help you decide if you should refinance your mortgage and lock in a great interest rate. To help you out, we’ve gathered together a range of mortgage providers in the table below who all offer refinancing.
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How can I decide if I should refinance my mortgage?
Now that you know the 6 reasons why you should consider refinancing your mortgage, here are some factors to think about when deciding if refinancing your mortgage is worthwhile.
When should I refinance my mortgage?
If interest rates have dropped. Experts generally agree on the 1% rule, which states that if the interest rates have dropped a full percentage or more, it’s worth refinancing your home because you could save a significant amount of money in interest charges.
If you find a better mortgage contract. Whether it’s switching to a lower interest rate, a different type of interest rate (fixed or variable) or a different type of mortgage (open, closed, hybrid, convertible, etc.), you could save yourself a lot of money in interest charges and/or fees.
If you want to pay off your mortgage faster. If your financial situation has changed and you’re now able to pay off your mortgage much faster than your original amortization period, refinancing could save you in the long run.
If your loan term has reached maturity. A loan term typically lasts anywhere from 6 months to 10 years. If your loan term is up, you’ll need to refinance your mortgage anyway. While refinancing with a different lender could cost more in fees, you could save in the long run with better loan terms.
If you’ll save money in the long run by accessing equity. If you’re going to consolidate and pay off higher-cost debts, access equity for investment or income-producing purposes, or do renovations on a rental property and reap tax benefits, you should consider refinancing your mortgage because that money could benefit you more if spent elsewhere.
If your credit score has improved. If you’ve now got a stronger credit score, you could potentially get a much more competitive interest rate – saving you money in the long run.
When should I not refinance my mortgage?
You have a “high-ratio” mortgage. If you have less than 20% equity in your home, your mortgage is considered a “high-ratio” mortgage. High-ratio mortgages are generally insured by the Canada Mortgage and Housing Corporation (CMHC), and unfortunately you can’t refinance a high-ratio mortgage.
Your loan term hasn’t reached maturity. If you’re looking to break the mortgage contract and refinance before your loan term is up, it could cost you big – especially if you have a closed mortgage. You could face a number of fees including prepayment, appraisal, reinvestment and administration fees. But, if your financial situation has changed, interest rates have dropped a fair bit or you’re looking to buy a new home, refinancing before your loan term has reached maturity might be a good idea.
Your lender doesn’t charge prepayment penalties. Most lenders charge prepayment penalties, but many will allow you to pay up to a certain percentage each year on an open mortgage without charging any fees. If your financial situation has changed and you’re able to pay up to 15% or 20% of your original mortgage amount each year without incurring any prepayment penalties, you could save yourself thousands of dollars in interest charges and dodge any fees involved with refinancing.
If you can’t afford to. That’s right – refinancing your mortgage isn’t free. You could incur any number of fees (also known as closing costs) including: Application fees, reinvestment fees, appraisal fees, inspection fees, registration fees, legal fees and any early repayment penalties you’ll face from your old lender. You should count on spending anywhere from 3% to 6% of the current amount of your mortgage on refinancing fees. However some lenders will fold those fees into the cost of your new mortgage. Just make sure that if you do opt for that option, you’ll still save money from refinancing with a larger loan.
How to increase your chances of being approved for mortgage refinancing?
Like with any loan application, you’re not guaranteed to be approved for mortgage refinancing. Mortgage refinancing lenders consider factors like your credit score, assets, debt and income when deciding if you should be approved and at what interest rate.
Lenders often determine your eligibility by calculating your Total Debt Service (TDS) ratio – which is the percent of your monthly household income that’s used to cover both housing costs and any additional debts. Experts suggest that you should try to keep your TDS ratio under 42% for the best chance of approval. You can use the CMHC’s calculator to find out what your TDS ratio is.
How to refinance your mortgage
Follow these steps to refinance your mortgage for lower interest rates, better terms or to take advantage of equity in your home.
Examine your current loan. Check your existing rate against national averages, and ask your current lender if they can offer a matching or lower rate.
Compare other providers. Compare the offer you get from your current lender to other providers to see which option will give you the best rates and terms.
Crunch the numbers. Think about how much you’ll save in interest vs how much it will cost you to close your current mortgage to see if refinancing is worth it.
Apply for the new loan. Refinance your mortgage with your current lender or switch to a different provider to take advantage of a better deal.
Close your existing loan. Use your new mortgage to pay off the balance of the old one, and then start making payments on your new loan contract.
What should I know before I apply to refinance my mortgage?
Eligibility requirements
To apply for mortgage refinancing, you’ll typically need to meet the following criteria:
Be at least 18 years old (and 19 in some provinces)
Be a citizen or resident of Canada
Be free from bankruptcy or other forms of unmanageable debt
Own your own home (usually with at least 20% equity)
Required documents and information
Government-issued ID. You’ll have to show proof of ID like your driver’s licence or passport.
Proof of income. You may be required to show your pay stubs, bank statements or letters of employment to verify how much money you make.
Credit report. You’ll need to allow your lender to pull your credit report so that they can assess your creditworthiness.
Other financial information. You may have to compile a list of your debts and assets, along with proof that you can pay for your closing costs.
Benefits of mortgage refinancing
Lower interest rates. You might be able to secure lower interest rates or better terms for your loan by refinancing.
More affordable monthly payments. You could end up with lower mortgage payments for a same-term loan, which means you can put more money towards your principal.
Easy access to financing. With cash-out refinancing, you can borrow against your home equity to get a loan (which will just be rolled into your mortgage).
Shorten your term. You may be able to refinance your mortgage to get a shorter term, which should help you save on interest and pay off your loan more quickly.
Eliminate mortgage insurance. Once you reach 20% home equity, you should be able to refinance your mortgage to save money on mortgage insurance.
What should I watch out for?
High closing costs. You could end up paying between 2% and 6% of your total mortgage to cover your closing costs, which has the potential to eat into your savings.
Other fees. Many lenders charge additional fees such as application, appraisal and legal fees which can make your overall bill more expensive.
Increased monthly payments. You could end up with higher monthly payments if you go with a shorter term – even though you’ll pay your loan off faster.
Not suitable for short-term mortgages. Refinancing may not make financial sense for you if your mortgage is small or you’re planning to sell your property soon.
Other options for borrowing against your home equity
If refinancing your mortgage doesn’t seem like a good fit, you may be able to pursue another option to borrow against the equity in your home.
Second mortgage. This is a second loan that gives you access to financing worth up to 80% of the value of your home, minus the balance on your first mortgage.
Home equity line of credit. This type of financing works just like a regular line of credit except it’s secured by the equity in your home.
Reverse mortgage. A reverse mortgage lets you borrow up to 55% of the value of your home but you have to be at least 55 years old to qualify.
Options for dividing your mortgaged properties
In general, you have a few options when divvying up your property assets:
Sell the property and share the profits with your ex.
Sell your share of the property to your ex.
Refinance the mortgage for sole ownership of the home.
When one spouse wants to keep the family home, it’s common for that person to refinance the existing mortgage. Refinancing allows you to take your ex’s name off the mortgage, and means you’re effectively taking on the sole financial responsibility of paying the mortgage. It also means you’ll be the sole owner of the home.
To refinance your home, you may need to provide to your lender:
Records that show you have the money to pay out your ex if you don’t own enough equity in the home.
Proof of an excellent history of repayment on your existing mortgage.
A recent property appraisal.
Can I take possession of an existing mortgage?
If you don’t want to go through the process of refinancing, some lenders will consider allowing you to assume the existing mortgage outright. This means that you’d take over the mortgage and its payments. However, you’ll need to provide proof that you’re financially able to cover the monthly mortgage on your single income, and you’ll need to find a lender that allows this.
Seek the help of a mortgage professional before deciding on this option.
Bottom line
Mortgage refinancing is an easy way to save money on interest or get better terms for your mortgage. Just keep in mind that you’ll have to pay high closing costs to refinance, which can eat into your overall savings. Find out more about what mortgage refinancing is and compare lenders to find the best deal for you.
Mortgage refinancing FAQs
This depends. Some lenders will refinance borrowers with bad credit, though you might have to pay higher interest rates and fees. It's a good idea to know your overall creditworthiness before applying to refinance your mortgage.
It depends on your financial goals. A fixed interest rate can keep your repayments low if you think interest rates will rise significantly. A variable-rate mortgage adjusts to the market, which means it could be helpful if you think interest rates will drop.
Yes, in most cases.Your lender will want an updated overview of your financial situation to determine whether or not you're eligible for mortgage refinancing. This can include information about how much of your mortgage is left owing, how much equity you have in your home and how much money you're earning every month to make sure you can keep up with payments.
Yes. Some mortgage lenders offer no-closing cost refinancing, but they often come with higher interest rates. Other times, the lender will add the closing costs to the total mortgage balance, which means you'll have a larger total mortgage to pay off. Ask what the options are before going with a no-closing cost refinance.
It typically takes 30 to 45 days to refinance a mortgage, but there are many factors that could lengthen that time — including how quickly you return documents, disclosures and other requested information. Before agreeing on refinancing, ask your lender how long you can expect the process to take.
Not necessarily. But having a good credit score of 650 or higher will mean you can qualify for more competitive rates and terms.
Yes, it is possible to refinance a mortgage with bad credit. Just like with all other financing endeavours with bad credit, you'll need to be patient when finding a lender. You're a risky borrower which means that it can take some time for you to find the right match. A good starting point is to refinance with your current lender.
Before applying with lenders, do your best to improve your credit to better your odds of approval. To help improve your credit in the future, always make your mortgage payments on time and in full.
You might be wondering if you need to wait a certain amount of time before you refinance your mortgage. You can actually refinance your mortgage at any time. Normally, people wait until their current mortgage term is close to expiry before refinancing. However, you can refinance at any time, especially if you're motivated to access home equity, lower your current interest rate, consolidate debt or to get better terms, among various other reasons.
Keep in mind that refinancing isn't free. There is normally a cost associated with changing your mortgage from both a cost and time perspective. For this reason, most are refinancing with a purpose in mind, not just for the sake of refinancing.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, and an Associate’s Degree in Science from Camosun College. Much of Claire’s coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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