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Should I refinance my mortgage?

Refinancing your mortgage can help you lock in a lower rate and lower your monthly payment — but there are risks.

As your financial situation and the economy change, you might be wondering, “should I refinance my mortgage?” Keep reading to learn reasons why you may want to refinance your mortgage now, and when it’s better to wait.

What is mortgage refinancing?

Refinancing a mortgage involves swapping out your current mortgage loan for a new loan that saves you money. Often, homeowners consider refinancing their mortgage if a new loan’s interest rate will be at least 0.5-1% lower than their current mortgage’s interest rate. However, this seemingly straightforward answer isn’t always the best strategy. It’s important to consider several different factors so that your plan to refinance your mortgage doesn’t end up costing you more.

Should I refinance my mortgage?

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:

CAFHL 6 reasons to refinance a mortgage Infogram1. 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.

How to calculate your home equity

5. To consolidate your debt

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? 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.

Name Product Interest Rate (APR) Loan Term Min. credit score Provincial availability
Tangerine Mortgages
5 Year Fixed Rate
All of Canada
Get competitive rates and make annual lump sum prepayments up to 25% of your original mortgage amount with a Tangerine mortgage.
Loans Canada Mortgage Refinancing
5 Year Fixed Rate
All of Canada
Loans Canada connects borrowers with a mortgage broker in their area. Bad credit, EI and CERB applicants are considered.

Compare up to 4 providers

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 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.

What to consider before refinancing your mortgage

  • Make sure you’ll actually save. Whether you’re looking to score a better interest rate, reduce your amortization period, access equity to pay off higher cost debts or use equity towards income-producing investments, you’ll need to do the math first to make sure that any fees you incur from refinancing will be offset by the savings or income you’ll make.
  • Budget in closing costs. Perhaps the biggest mistake people make when refinancing is failing to accurately assess the fees associated with refinancing. Refinancing fees might include an application fee, reinvestment fee, appraisal fee, inspection fee, registration fee, and any legal fees and penalties you’ll face. The fees associated with refinancing are often about 3% to 6% of your current mortgage amount. These expenses must be accounted for to make sure the savings outweigh the costs of refinancing.
  • Shop around and compare lenders. Many homeowners fail to shop around when choosing a mortgage lender – and the same goes for refinancing. Usually, the first call that homeowners make when looking to refinance is to their current lender. But shopping around can help you learn your options and sometimes get you a better deal.
  • How long you’ll live in your home. You’ll generally need to live in your home for at least a few years after refinancing in order to save enough on your monthly payments to make up for the 3%-6% of your mortgage you spent in refinancing fees. To really reap the savings, you should plan to stay in your home for at least 3 years after refinancing.

    What should I ask my lender before refinancing

    Once you’ve narrowed down your list of mortgage refinancing providers, especially if you’ve settled on a new lender, you’ll want to ask the following questions:

    • Why the mortgage refinancing product they’re recommending is a good match for you.
    • For the details of the mortgage and the refinancing costs.
    • For an estimate of all fees and closing costs.
    • How quickly you should expect to hear back after you call or email.
    • How long it’ll take to complete the refinancing process.
    • If you can receive the closing documents before the closing so you can review them.
    • What your options are for new payment terms.

    The answers to these questions will help you determine the suitability of a mortgage product and whether it makes sense to refinance now and with a specific lender.

    Bottom line

    When done right, refinancing your mortgage can save you a lot of money in the long run. But it’s a big decision, so carefully consider why you’re doing it, whether it’s going to save you money and whether you can find a lender offering more competitive rates and terms.

    If you want to learn more about how refinancing mortgages work, head to our comprehensive guide here.

    Frequently asked questions about refinancing your mortgage

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