How to refinance your mortgage in Canada

Do you have an existing mortgage that you are interested in refinancing? You’ve come to the right place! Below, BrokerLink dives deep into the topic of mortgage refinancing in Canada. From what it means to refinance your mortgage to the main reasons for doing so, keep reading to learn more about this popular financial strategy.

Mortgage refinance definition

When you hear the term “refinanced mortgage” in Canada, it refers to the practice of breaking your existing mortgage contract in order to secure a different mortgage loan, and then paying the remaining mortgage balance with your new loan. The new mortgage loan you secure when you refinance your mortgage is completely different than your previous mortgage loan. It has its own unique terms and conditions and also different interest rates. By refinancing their mortgage, a borrower might be able to increase the size of their mortgage loan, as the loan they may receive by refinancing could be as much as 80% of their home’s value. For many reasons, which we will delve into below, the financial strategy of refinancing a mortgage is often preferable to taking on other forms of debt. This is because mortgage interest rates are typically lower than the interest rates on other types of loans a borrower may be eligible for.

Popular reasons to refinance a mortgage

The two most common reasons that borrowers choose to refinance their mortgages are as follows:

• To lower the cost of mortgage payments: If interest rates have dropped significantly from when you first took out your mortgage loan, refinancing your mortgage could help reduce your monthly mortgage payments. In the long run, this could help you pay off your mortgage much earlier than if you stick with your current loan.
• To tap into home equity and consolidate debt: The second most popular reason borrowers opt into mortgage refinancing is to tap into their home’s equity. There are many benefits to doing this. For example, doing so can help you consolidate your debt or pay for a major expense, like buying a rental property, renovating a home, starting a business, having a baby, or your eldest child going off to college. Ultimately, refinancing a mortgage can allow you to leverage equity that would otherwise be tied up.

We dive deeper into why a person might be inclined to refinance their mortgage below:

Refinancing mortgage to borrow more money

The main reason that a borrower might be interested in refinancing their mortgage is to borrow more money. If your existing mortgage is less than 80% of your home’s appraised value, then refinancing your mortgage might make sense, especially given that doing so allows you to obtain a mortgage that is up to 80% of your home’s value. For example, if your existing mortgage is only 40% of your home’s value, you could refinance to borrow the remaining 40%, increasing the amount of your mortgage loan to 80% of your home’s value. Why do this? Your home equity increases alongside the value of your home. It also increases the more that you pay off your mortgage. By refinancing your mortgage, you will likely be able to borrow more money, which can then be used for everything from consolidating debt to paying off credit cards or funding home renovations or a second property.

Refinancing mortgage to take advantage of lower interest rates

Interest rates are constantly changing, which means the interest rate that was available to you at the time that you took out your mortgage loan may not be the same as what’s available to you now. That said, if you purchased a fixed rate mortgage, one of the most popular options among homeowners, then you are locked into a set interest rate for the entire duration of your term. This means that if interest rates go down during your term, you won’t be able to benefit from them - unless you refinance your mortgage, that is. Depending on how much interest rates have gone down, it may be worth refinancing your mortgage to take advantage of these lower rates, even if your mortgage lender would charge you a major penalty for doing so. Whether refinancing your mortgage for this reason makes sense depends on many factors, including how much time is left in your current mortgage term and your financial circumstances. Contact a financial professional for advice on whether a refinanced mortgage is right for you.

Refinancing mortgage to amend your mortgage

One final reason that refinancing your mortgage might be worthwhile is if you want to amend your mortgage. Refinancing allows a borrower to alter many aspects of their mortgage, from the amortization period to the monthly mortgage payment amount. You may even be able to change the type of mortgage you have, e.g. from a variable rate mortgage to a fixed rate mortgage. Keep in mind that altering your mortgage may come with penalties, though many lenders allow borrowers to switch mortgage rate types without any penalties. Further, depending on how you want to change your mortgage, you may not even need to refinance. Speak with your lender about your options if you are no longer satisfied with the terms of your mortgage contract.

The best time to refinance a mortgage

If you are thinking of refinancing your mortgage, the best time to do so is at the end of the mortgage term. This is especially true if you have a closed fixed rate mortgage, as if you attempt to refinance your mortgage before the end of the term, you will likely be charged a hefty penalty. Typically, penalties are highest for fixed rate mortgages and lower for a variable rate mortgage. However, even for a variable rate mortgage, they can still amount to three months’ worth of interest payments, which can add up quickly. Conversely, if you can wait until the end of the term before refinancing your mortgage, you may be able to completely avoid these penalty fees. Therefore, if you are wondering if it’s worth refinancing your mortgage midway through your existing mortgage term, you will have to weigh the pros and cons. We recommend asking yourself the following questions before making this decision:

• How does the existing interest rate on your mortgage compare to the other interest rates?
• currently available?
• How much will it cost you in additional fees to refinance your mortgage (e.g. legal fees and closing costs like title search and title insurance fees)?
• Is the purpose of mortgage refinancing to consolidate high-interest debt?
• How much is the prepayment penalty for breaking your mortgage partway through the term?
• Would refinancing your mortgage, taking into account how much doing so would cost you, vastly improve your day-to-day life and peace of mind?

Alternatives to mortgage refinancing

If you aren’t convinced that mortgage refinancing is right for you, or the costs are too high to justify it, consider the following list of alternatives:

Renegotiate your current interest rate

Some mortgage lenders allow borrowers to renegotiate their interest rates before the end of the term. If the main reason that you are interested in mortgage reinforcement is to take advantage of lower interest rates, this could be a great option. Speak with your lender about the possibility of lowering your interest rate in exchange for extending the term of your mortgage loan. This is what’s known as a “blend and extend” strategy, whereby your mortgage term is lengthened and the existing interest rate is blended with a new lower interest rate that reduces your overall rate. This method usually allows borrowers to avoid any penalty fees.

Consider a home equity line of credit

A home equity line of credit or HELOC is another viable alternative to mortgage refinancing. HELOCs allow borrowers to borrow against the equity in their homes. However, you must have a minimum of 20% equity in your home to be eligible, and the line of credit amount cannot exceed 65% of your home’s market value. One of the biggest perks of HELOCs is that they can be taken out in addition to home insurance mortgages, which means you don’t have to break your current mortgage contract to be eligible. They are ideal for borrowers who do not need to borrow a large sum of money at once. The one downside is that HELOC interest rates are usually higher than the interest rates that come with a refinanced mortgage. However, HELOC can often still help you qualify for a mortgage free discount on your insurance policy.

Take out a second mortgage

One final alternative to mortgage refinancing is taking out a second mortgage. A second mortgage allows borrowers to access the equity in their homes. Plus, it is taken out in addition to your first mortgage, which means no prepayment fees. That said, interest rates on second mortgages are usually quite high, higher than both HELOCs and refinanced mortgages.

Mortgage renewal vs. mortgage refinancing

Sometimes the phrases “mortgage renewal” and “mortgage refinancing” are used interchangeably, so we wanted to set the record straight. A mortgage renewal is when, at the end of the term on your existing mortgage, you extend your mortgage term often by about five years and keep the same terms as your original mortgage. You also remain with the same mortgage lender. This is done when a homeowner has not been able to pay off the full amount of the mortgage by the end of the term. With a mortgage renewal, your mortgage interest rate may change, but you will not be able to increase the amount of your mortgage to borrow any more money.

In contrast, a mortgage refinance can be done at any time. You do not have to wait until the end of the term, though prepayment penalties will likely apply if you choose to refinance your mortgage partway through the term. Further, mortgage refinancing allows a borrower to borrow more money, which can be used for things like debt consolidation or to fund major expenses, like the purchase of a second home, college tuition, home improvement projects, and more. With mortgage refinancing, the interest rates and other terms of the mortgage contract are likely to change.

The costs of refinancing a mortgage

Before deciding to refinance your mortgage, it is important to be aware of the costs that come with it. Beyond the prepayment penalties, mentioned above, there are several other fees associated with mortgage refinancing. Some of these fees include legal fees, home appraisal fees, mortgage registration fees, mortgage discharge fees, and more. While you may be able to avoid some of these fees, others are unavoidable.

Mortgage prepayment penalties

A prepayment penalty will likely apply if you choose to refinance your mortgage before the term has ended. If this applies to you, then chances are the prepayment penalty will be the largest fee you incur. The amount of the penalty will depend on the terms and conditions of your mortgage. For example, breaking a closed fixed rate mortgage typically has steeper financial penalties than breaking an open or variable rate mortgage. The size of your mortgage and how far into the term you are will also play a role. Generally, you should expect your prepayment penalty to cost a few thousand dollars at a minimum. However, it can amount to tens of thousands of dollars in some cases. Luckily, mortgage prepayment penalties can be avoided by simply waiting until the end of your existing mortgage term to refinance.

Legal fees

In order to refinance your mortgage, you will need to hire a real estate attorney to review the necessary paperwork. Working with a lawyer adds up quickly, so you should expect this to cost around $1,000.

Home appraisal fees

If you choose to refinance your mortgage, your mortgage lender will likely require you to get a home appraisal. Why? Your lender needs to know the updated value of your home to accurately calculate how much you can refinance your mortgage for. The cost of hiring a home appraiser varies but will usually be several hundred dollars.

Mortgage registration fees

The next fee to budget for is the mortgage registration fee. In refinancing your mortgage, you are taking out a new mortgage, which means you will need to pay to have it registered. Mortgage registration fees vary by province. For instance, in Ontario, registering your mortgage costs $77 and in Quebec, it costs $146.

Mortgage discharge fees

Lastly, anyone interested in refinancing their mortgage must be prepared to pay a mortgage discharge fee. This fee only applies if you are switching mortgage lenders. If you are refinancing your mortgage with the same lender, you will not incur this fee. Mortgage discharge fees typically range from $200 to $350 depending on where you live.

The pros and cons of a refinanced mortgage

To help you decide once and for all whether mortgage refinancing is right for you, we outline the pros and cons of a refinanced mortgage below:

The pros

• Mortgage refinancing allows borrowers to access their home equity at a lower interest rate
• Changing from a variable rate mortgage to a fixed mortgage rate via mortgage reinforcing could allow you to lock in a lower mortgage interest rate
• Mortgage refinancing lets homeowners borrow a large sum of money at once, which they can use to pay for big expenses, like university tuition, home renovations, and more
• Refinancing a mortgage might allow you to extend your mortgage amortization period and subsequently lower your monthly mortgage payments

The cons

• Refinancing a mortgage can have higher interest rates than a mortgage renewal, especially if done midway through the term
• A borrower will be charged hefty prepayment penalties if they choose to refinance their mortgage before the end of the term
• Getting approved for a mortgage refinance takes time and patience
• If you use mortgage refinancing to frequently alter your amortization period, this can lead to paying more money in interest

Contact BrokerLink to discover more about refinancing mortgages in Canada

Refinancing your mortgage is a major decision, but depending on the circumstances, it can have huge, long-term benefits. If you still have questions about mortgage refinancing and want advice from an expert, contact BrokerLink today. Each of BrokerLink’s insurance advisors is licenced, friendly, and eager to answer your questions. We can help you understand how mortgage refinancing works and even make you aware of the consequences to your home insurance policy. For instance, depending on how much the value of your home increases following mortgage refinancing, you might be eligible for high-value home insurance. On the flip side, an increase in value could raise your property insurance premium, but a BrokerLink expert can let you in on a few tips to help you cut home insurance costs, like how you can save money through home insurance tax deductibles. To learn more about our top-notch home insurance services, contact BrokerLink today. Give us a call, send us an email, visit us at one of our Canadian locations, or request a free home insurance quote online now.

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FAQs about mortgage refinancing in Canada

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