How to Refinance a Mortgage in Canada: A Comprehensive Guide - My Rate Compass (2024)

• The decision to refinance should be based on your financial circ*mstances and goals. However, some scenarios can make refinancing particularly appealing:

• Falling Interest Rates: If mortgage rates have fallen significantly since you took out your loan, refinancing may allow you to secure a lower interest rate and save on interest payments over time.
• Improved Credit Score: If your credit score has improved since you took out your mortgage, you may be eligible for lower rates, making refinancing a potentially beneficial move.
• Accessing Equity: If you need to access a large sum of money and have significant equity in your home, refinancing can be a cost-effective way to do this.

While these reasons seem promising, it’s important to understand the processes and costs involved before considering a mortgage refinance. The following sections explore the costs and benefits of mortgage refinancing.

• Lower interest rates: If current mortgage rates are lower than what you have, refinancing can save you money over time. Even a 1% difference in interest can save you thousands.
• Accessing home equity: Home equity refers to how likely you are to sell your property for more money than you bought it for. You can build equity by refinancing if you move to a shorter loan term. If you already have good home equity, refinancing allows you to add value such as home renovations and investment by accessing your equity (the difference between your home’s value and what you owe).
• Altering mortgage terms: Changes in your financial situation might necessitate changes in your mortgage terms. A homeowner may choose to change their monthly payment to be less or more, depending on their financial situation. They may also wish to switch from a fixed-rate mortgage to an Adjustable Rate Mortgage (ARM).
• Debt Consolidation: Debt consolidation involves merging your debts into one manageable payment. When you refinance you can pay off all your debts with one loan, then pay back the loan. This can be a strategic move if you want to consolidate high-interest debts.

Refinancing your mortgage allows you to restructure your mortgage terms to something that suits your financial goals and lifestyle. However, this is not an easy process and involves certain disadvantages:

• Prepayment Penalties: Refinancing often involves breaking your current mortgage term, which could result in prepayment penalties. These are penalties for paying off a loan earlier than the due date. Prepayment penalties in Canada typically cost 3 months of interest on your remaining loan. You don’t pay prepayment penalties if you have an open mortgage agreement.
• Extended Mortgage Term: Refinancing can result in a longer mortgage term. While this may reduce your monthly payments, it could also mean you’ll be in debt for longer.
• Potential for more debt: If you’re refinancing to access the equity in your home, it’s crucial to have a plan for using these funds wisely or you could end up in more debt. If you refinance your mortgage to consolidate your debt, you will have to be careful to stick to your new payment plan.
• Impact on Credit Score: Refinancing your mortgage involves a hard credit check, which can temporarily lower your credit score. However, once your new mortgage is in place and you’re making payments on time, your credit score should start to increase again.

Now that you have a rough overview of the pros and cons of refinancing your mortgage, let’s go over how to calculate the costs involved in mortgage refinancing.

Refinancing your mortgage involves costs such as prepayment penalties, legal and appraisal fees, and mortgage registration fees. If you lengthen your mortgage agreement, the long-term costs of paying your monthly instalments will also add up. When calculating the costs involved in refinancing, you need to account for the following:

• Prepayment Penalties: These penalties can be significant if you’re breaking your mortgage term early. The exact amount will depend on your mortgage contract and lender.
• Legal and Appraisal Fees: These are necessary to process the refinancing and can range from a few hundred to a few thousand dollars.
• Mortgage Registration Fee: This fee is charged to register the new mortgage and varies based on the province.

If you’re uncertain where to begin your calculations, there are several online calculators to help give you a rough idea of how much you may save or pay extra for your mortgage refinance. Here is an example of a mortgage refinance cost calculator in Canada.

If refinancing isn’t the best option for you, there are alternatives to consider:

Mortgage Renewal: If your mortgage term is almost up, you may choose to renew your mortgage with your current lender or switch to a new lender, potentially at a lower rate.

Mortgage Restructuring: This involves changing the terms of your existing mortgage, such as extending the amortization period or changing the interest rate.

Second Mortgage or Home Equity Line of Credit (HELOC): If you need to access the equity in your home, a second mortgage or HELOC could be an alternative to consider.

Q: Is it worth it to refinance your mortgage?

A: Depending on your financial situation and level of debt, refinancing can be beneficial. You can access your home equity, get lower interest rates, and get to change your mortgage terms. If the benefits outweigh the potential prepayment penalties and additional administrative and long-term costs, then refinancing is a beneficial move.

Q: How does refinancing affect your credit?

A: Refinancing your mortgage temporarily lowers your credit score, but with regular payments, your credit score will soon be back to normal.

Q: What happens when you refinance your mortgage?

A: When you refinance your mortgage, you pay off your existing mortgage and replace it with a new one, potentially with better terms or a lower interest rate.