A mortgage refinance also allows you to unlock the equity that you have built up in your home, which is the value of your home minus the remaining balance on your mortgage. Mortgage refinancing is when you replace your old mortgage with a new mortgage that has a bigger balance, and can also include changes to the term length and the mortgage interest rate. The difference between your current balance and the new mortgage is the amount that you will be able to borrow as a lump-sum cash payment.
Every mortgage has a limited term in Canada. Only 4.8% of mortgages in 2018 had a term greater than 5 years. The CMHC found that the 5-year fixed-rate mortgage was the most popular in Canada in 2019. When the term is over then your mortgage term expires and you will either need to pay off your mortgage in full, or take one of the following actions: renew, refinance, or switch mortgages.
|Change Mortgage Amount||Yes||No||No|
|Change Mortgage Amortization||Yes||No||No|
|Mortgage Stress Test||Yes||No||Yes|
|Fees||Appraisal, Discharge, Assignment, Registration, and Legal Fees||None||Appraisal, Discharge, Assignment, Registration, and Legal Fees|
Of all mortgage renewals and refinancing in Canada in 2020, 90.4% of them were at the same lender. Renewing at the same lender is quick and easy, and it may not require additional documentation depending on the lender. 96.7% of same lender renewals were approved in 2020, compared to only 61.3% of mortgages for new home purchases.
While you can change the mortgage interest rate, payment frequency, and term length when negotiating your renewal, your mortgage principal balance will remain the same. You can pay off 0 to 20% of your mortgage before renewal depending on your current mortgage contract.
Open mortgages allow you to prepay before the end of the term without incurring prepayment charges, however they come with higher mortgage interest rates. Closed mortgages offer a lower interest rate, but it can come with prepayment charges depending on the amount. Some lenders offer prepayment privileges that will allow you to pay up to a certain amount of the principal, with that amount directly paying down the principal. Prepayments may be limited to a single lump-sum payment per year at some lenders. If your mortgage lender is federally regulated, payment privileges must be clearly displayed in your mortgage agreement contract.
Annual prepayment limits do not roll over. If you do not use your limit in one year, you cannot apply it to the next year. Mortgage prepayment allowances depend on your lender. RBC, TD, CIBC, and BMO all allow principal prepayments of any amount at the time of renewal without prepayment penalties.
You will receive a mortgage statement before renewal that contains information such as the principal remaining, new offered interest rate, and term length if your lender is federally regulated. Be aware that your mortgage renewal can be automatic, even if you do not take action on your end. The terms listed on your mortgage statement will apply, which may not be the best current mortgage rate in Canada. You can always negotiate for a better interest rate than the one stated in your mortgage statement before your mortgage is renewed especially if you do shop around and show them a lower rate from a competitor
If you no longer want to stay with the same mortgage lender at renewal, you can always switch to another mortgage lender. This can be due to a variety of reasons, such as a better mortgage rate offered by another lender, or mortgage terms that are more suitable for you (e.g. less mortgage penalty). There are costs to changing mortgage lenders that may be charged, such as appraisal and registration fees. Your new lender may cover these transfer costs.
Switching to a new lender also requires you to pass a mortgage stress test if the lender is federally regulated. A mortgage stress test is not required if you renew your mortgage at the same lender. Provincially regulated credit unions, quasi-regulated B Lenders, and private lenders are not required to conduct a mortgage stress test. You may be denied at a federally regulated lender if you fail the stress test when transferring over, such as if your income has dropped.
|Mortgage Stress Test Required|
|B and Private Lenders||No||No||No|
If you refinance your mortgage at the renewal there would be no charge but if you refinance your mortgage before your term is up, you may be charged a mortgage prepayment penalty. You will be charged mortgage registration and appraisal fees. You may be charged legal fees if you require a lawyer, and switching to a new lender may result in a mortgage discharge fee.
Unlike simply renewing a mortgage, refinancing allows you to unlock up to 80% of the equity that you have built up in your home, which is your home market value minus your mortgage amount that is left. 81.4% of refinances from the same lender were approved in 2020.
Refinancing your mortgage allows you to put your home equity to work towards debt consolidation, home renovations, or even for investing. Compared to a home equity line of credit (HELOC), refinancing allows you to borrow at your mortgage interest rate, which can be significantly lower than HELOC rates.
While a refinance can be a great way to unlock equity in your home, it can come with an expensive prepayment penalty. If you have a fixed rate mortgage and have a few years left on your mortgage contract, it can be very expensive to refinance your home. In these cases, it can be better to use a HELOC or a second mortgage to draw from your home equity without interfering with your original mortgage.
To see if refinancing is worth it for you, compare what it would cost to borrow through other sources, such as a regular loan or a HELOC, versus the cost of refinancing. Refinancing can take from two to four weeks and requires information such as your assets and proof of income, along with a home appraisal.
Increasing your mortgage balance means that you will have to pay back more in the future. However, it may be worthwhile to refinance if it means you can consolidate debt that has higher interest rates, such as credit card debt.
Yes, you can refinance to consolidate debt. Refinancing means that you can receive most of the equity value of your home as a lump-sum amount, which also means that you will be charged interest in the full amount as well, even if you do not use the entire cash amount. This may be worth it if you need to make a large lump-sum payment for an expense, such as paying off high-interest credit cards, but it might not be beneficial if you have no plans for the cash. A home equity line of credit allows you to withdraw only what you need to use, and in turn, interest is only charged on the amount that you actually use. You can check the potential savings using a loan calculator and determine if it's worth it for you.
|Rates as of November 2020||Interest Rates|
|Mortgages||1.5% - 5.2%|
|Home Equity Line of Credit (HELOC)||2.65% - 5.45%|
|Credit Cards||8.99% - 26.99%|
|Car and Auto Loans||4.79% - 10%|
|Unsecured Personal Loans||6% - 16%|
|Government Student Loans||2.45% - 4.95%|
|Private Student Loans||Varies|
You do not have to increase your mortgage principal balance when refinancing. Refinancing gives you an opportunity to take advantage of current mortgage interest rates if they are lower than your mortgage rate. It can be advantageous to break a mortgage early and pay prepayment charges if it means you can roll into a much lower interest rate. If your credit score and financial situation have improved, your mortgage interest rate may also be lower. You may also opt to change to a longer amortization period, which will allow for lower mortgage monthly payments.
Most mortgage lenders will require an appraisal when refinancing your mortgage. Home appraisals determine the value of your home, which may have changed significantly since your last valuation. Most lenders will want an up-to-date value before lending you more money against your home.
Refinancing a mortgage at traditional lenders such as banks can be difficult with bad credit due to their stricter lending criteria. B-Lenders and private mortgage lenders are an option for those with bad credit, with some private lenders having no minimum credit score requirement at all.
There is no limit to the number of times that you can refinance your mortgage, as long as you have not reached the maximum cap of 80% of your home’s value. Mortgage refinancing does come with fees and charges each time you refinance.