Mortgage refinancing in Canada

Do you want to secure a lower rate for your mortgage or free up the equity in your home? 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 one. This new mortgage may allow you to:

• Get a lower interest rate
• Access terms that better suit your financial situation, such as a shorter amortization period or a fixed interest rate
• Increase your mortgage amount 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.

Why should I refinance my mortgage?

Here are four reasons why you should consider refinancing your mortgage:

1. To lower your interest rate

Refinancing your mortgage to get a lower interest rate can save you money over the life of your mortgage. Even if you refinance and get a rate that’s 1% lower, while it might not sound like much, it can make a big difference to the total amount of interest you end up paying.

For example, let’s say you owe $350,000 on your fixed-rate mortgage with a 20-year amortization period. Refinancing to lower your interest rate from 6% to 5% will lower your monthly payment by $197.66 and save you $47,439.27 in total interest. Please note that this example doesn’t take into account the fees associated with refinancing.

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

When you shorten your amortization period, you commit to paying off your mortgage earlier, which means you’ll pay less interest over time. The downside is that your monthly payment increases, so you’ll need to make sure you have room in your budget to cover the extra cost each month.

For example, let’s say you owe $300,000 on your mortgage with 15 years remaining and an interest rate of 5%. Refinancing to a mortgage with a 10-year amortization period and the same 5% interest rate would increase your monthly payment by $809.59, but it would also save you over $45,000 in interest over the life of your mortgage.

3. To switch to a variable or fixed rate

Switching between a variable and fixed rate mortgage can help you lock in a better interest rate depending on how the prime interest rate fluctuates.

• Switching to a variable rate. The interest rate on a variable rate mortgage changes throughout your loan term. Variable rates fluctuate based on the prime rate, so your monthly payments will change over time — for better or for worse. Consider switching to a variable rate to benefit from a low prime rate and if you’re comfortable paying more when rates increase. Check out our variable rate mortgage guide for more information.
• Switching to a fixed rate. A fixed rate mortgage has an interest rate that stays the same for the entire loan term. This means you won’t be impacted by fluctuations in the economy and your payments stay the same from month to month. This protects you from interest rate hikes, but you won’t benefit when rates are lowered. Find out more in our fixed rate mortgage guide.

4. To access extra funds

If you’ve built up some equity in your home, you could refinance your mortgage in order to gain access to some cash. You can borrow up to 80% of the value of your home with a mortgage refinance, so you could use the money to fund a major expense such as a home renovation.

You could also use the funds from refinancing your mortgage to consolidate debt and pay off high-interest debts. While you’ll have to pay interest on your mortgage, the rate could be lower than on other debts – which will end up saving you money in the long run.

Learn more: How to calculate your home equity

When to consider mortgage refinancing

• If interest rates have dropped. The general rule is that if interest rates have dropped 1% or more, it could be worth refinancing your mortgage to save a significant amount of money on interest charges.
• If your financial situation has changed. Maybe your income has increased and you can now afford a larger monthly payment. Alternatively, maybe you just want the security of a fixed interest rate to make it easier to budget for your monthly payments.
• If your credit score has improved. If you’ve got a higher credit score than when you took out your current mortgage, you could get a lower interest rate and save money.
• If you want to access your home equity to save money in the long run. If you’re going to consolidate and pay off higher-cost debts with a lower-interest mortgage, refinancing could make good financial sense.

When might mortgage refinancing be a bad idea?

• If it’s not worth it. Refinancing your mortgage isn’t free. You could incur multiple fees (also known as closing costs) including: application fees, reinvestment fees, appraisal fees, registration fees, legal fees and any early repayment penalties you’ll face from your old lender. You should count on spending anywhere from 2% to 6% of the current amount of your mortgage on refinancing fees, so crunch the numbers to work out if refinancing will still save you money.
• If 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.
• If it’s too risky. Refinancing your mortgage to consolidate unsecured debts can be a good way to save money. But keep in mind that the debt will now be secured by your home, so there’s a higher risk of losing your home if you can’t make your loan payments.

How to increase your chances of being 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 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

1. Assess your current loan. Check how your existing rate stacks up against what other lenders are offering, and ask your current lender if they can offer a matching or lower rate.
2. Compare lenders. Compare the offer you get from your current lender to other providers to see which option will give you the best rates and terms.
3. Crunch the numbers. Think about how much you’ll save vs how much it will cost you to close your current mortgage to see if refinancing is worth it.
4. 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.
5. 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 be free from bankruptcy or other forms of unmanageable debt. You’ll also need to 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 your income.
• Credit report. You’ll need to allow your lender to pull your credit report so 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.

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.
• Increased monthly payments. Refinancing to a mortgage with a shorter loan term will save you money in the long run, but it will also mean a higher monthly payment. Make sure there’s enough room in your budget to afford this new repayment amount.
• 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.

Bottom line

Mortgage refinancing can help you save money on interest, get better mortgage terms or tap into your home equity. Just keep in mind that you’ll have to pay high closing costs to refinance, which can eat into your overall savings. Crunch the numbers to find out if mortgage refinancing will be worth it, and compare lenders to find the best deal.

Mortgage refinancing FAQs

• How does mortgage refinance work in Canada?

  When you refinance a mortgage, you take out a new mortgage to pay off your current mortgage. You can refinance to get a lower interest rate, switch to a fixed or variable rate, change your loan amortization period or access extra cash. But while mortgage refinancing can save you money in the long run, keep in mind that fees apply.

• Can I refinance my mortgage if I have bad credit?

  It depends. Some private lenders will refinance borrowers with bad credit, though you might have to pay higher interest rates and fees. It's a good idea to check your credit score before applying to refinance your mortgage.

• Should I refinance to a fixed or variable rate mortgage?

  It depends on your financial goals. A fixed interest rate can keep your repayments low if you think interest rates will rise significantly, and it also offers the security of a fixed monthly payment. A variable rate mortgage adjusts to the market, which means it could be helpful if you think interest rates will drop.

• 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 1% lower interest rate than you currently pay, for example, you could save thousands of dollars by the time you pay off your mortgage.

  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.

• Will I need a home appraisal to refinance my mortgage?

  Yes, you will usually need to have your home appraised when you refinance your mortgage. This allows the lender to determine the current market value of your home and establish the loan amount you qualify for.

• Is it possible to refinance without closing costs?

  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.

• How long does it take to refinance a mortgage?

  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.

• Do I need to have good credit to refinance my mortgage?

  Not necessarily, as some private lenders are willing to work with bad-credit borrowers. But having a good credit score of 650 or higher will mean you can qualify for more competitive rates and terms.

• When can I refinance my mortgage?

  You can 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 to access home equity, lower your interest rate, consolidate debt or to get better terms.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio