Canada Mortgage Refinancing Guide

A mortgage refinance is when you pay off your current mortgage and replace it with a new mortgage. This new mortgage may have a higher mortgage balance in order to borrow more money, or it may have a different interest rate, term, or mortgage type. Mortgage refinance works by allowing you to replace your old mortgage, and it's needed if you want to change certain specifics of your mortgage. Mortgage refinancing is also known as remortgaging, with remortgaging being a more commonly used term in the UK.

When Is a Mortgage Refinance Needed?

Refinancing your mortgage to borrow more money involves using your home equity. If your current mortgage is less than 80% of the value of your home, you are able to refinance your mortgage up to 80% of your home’s value. The difference between the refinanced mortgage balance and your current mortgage will be the amount that you are borrowing.

If you don’t need to borrow a large amount of money all at once but would like to have the option available to you, a home equity line of credit (HELOC) would be a great alternative to a refinance. HELOC rates are higher than refinance mortgage rates, but you only have to pay interest for what you actually borrow with a HELOC.

You can use this unlocked equity to consolidate debt or use the cash for any purpose, such as making home improvements or to travel.

Fixed-rate mortgages lock you into a set interest rate for the length of your mortgage term. If interest rates fall during your term, you won’t be able to benefit from a fixed mortgage rate until you either renew your mortgage at the end of your term or refinance during your term.

If you refinance before your mortgage is up for renewal, your mortgage lender can charge hefty mortgage penalties as you will be breaking your mortgage. To see whether you will be able to save money through a lower interest rate after mortgage prepayment penalties are charged, use our mortgage refinance calculator.

Refinancing your mortgage allows you to change all aspects of your mortgage. For example, you might want to extend your mortgage amortization in order to have lower monthly mortgage payments, or you might want to switch to another mortgage product that has features that you particularly want, such as prepayment privileges. If you currently have a variable-rate mortgage and you think that interest rates will increase significantly in the near future, you might want to switch to a fixed-rate mortgage to lock in a lower rate today. You can change from a variable mortgage rate to a fixed mortgage rate when you refinance your mortgage.

Some mortgage lenders offer mortgages that allow you to switch mortgage rate types all without refinancing or any penalties that come with refinancing. For example, CIBC's Variable Flex Mortgage is a variable-rate mortgage that can be converted at any time to a fixed-rate mortgage with a term of at least three years.

Mortgage refinance rates are generally higher than rates offered for new home purchases and for mortgage renewals or transfers. That’s because mortgage refinances are slightly riskier for mortgage lenders, as you’ll be able to borrow more money when refinancing. Even if you’re not borrowing more money, you might be refinancing to take advantage of a lower mortgage rate, which lenders may want to avoid. Our Canada mortgage rates page allows you to compare mortgage refinance rates from refinancing lenders across Canada.

Mortgage refinance costs include mortgage registration and legal fees, as you are replacing your current mortgage with a new mortgage. You will also need to pay for a home appraisal. Other costs depend on when you refinance and where you refinance.

If you refinance by switching to another lender, you will be charged a mortgage discharge fee. Discharging adds your new lender to your property title and removes your old lender from it.

If you are refinancing before your term is over, you will need to pay mortgage prepayment penalties depending on your mortgage type. For variable-rate closed mortgages, you will need to pay three months of interest as a penalty. For fixed-rate closed mortgages, the penalty is the greater of three months of interest or an interest rate differential. To calculate your mortgage break penalty, visit our mortgage penalty calculator.

Open mortgages have no prepayment penalties. You can also avoid prepayment penalties by refinancing your mortgage when your mortgage is up for renewal at the end of your term.

Costs of Refinancing a Mortgage

How much will it cost to refinance my mortgage?

You will need to pay for legal fees, home appraisal fees, and mortgage registration fees, but can avoid paying for prepayment penalties and mortgage discharge fees under certain circumstances. The mortgage discharge fee can be avoided if you stay with the same lender. If you leave your current lender to refinance with another lender, you will have to pay a mortgage discharge fee.

If you wait until the end of your term to refinance, you won’t have to pay mortgage penalties. If you refinance before your term is over, you will be charged penalties if you choose to refinance at current mortgage rates. However, you can choose to blend and extend your mortgage rate, which mixes your mortgage rate with current rates. This allows you to avoid paying for mortgage penalties, although your interest rate will not be fully adjusted to current interest rates.

These fees can add up to a hefty amount depending on which fees apply to you.

• Legal Fees ($750 - $1,250)

  You will need to work with a real estate lawyer who will facilitate the paperwork for refinancing your mortgage. Legal fees will be around $750 to $1,250 for a mortgage refinance.

• Home Appraisal ($300 - $600)

  Your mortgage lender will need to have an up-to-date value of your home in order to determine how much you can refinance your mortgage for. 80% of the appraised value of your home will be the maximum limit that your lender will let you borrow. A home appraisal will cost from $300 to $600.

• Mortgage Registration ($70)

  Since a mortgage refinance involves a new mortgage that will replace your old mortgage, you will need to pay a fee to have the new mortgage registered. This fee will vary depending on your province. For example, Ontario charges $77, Quebec charges $146, and British Columbia charges $5 for each year of the lien.

• Mortgage Discharge ($200 - $350)

  The opposite of a mortgage registration, your mortgage will need to be discharged if you are switching to another lender. You do not have to pay this fee if you are staying with your current lender. This fee can range from $200 to $350, depending on your province.

• Mortgage Prepayment Penalties

  Mortgage penalties for refinancing before the end of your term will be the largest cost to refinancing a mortgage. This penalty will depend on your mortgage type, whether it is a variable rate or fixed rate, on the difference between your mortgage rate and current mortgage rates offered by your lender, on the size of your mortgage, and on how early you are refinancing. Usually, mortgage penalties can be a few thousand dollars, or can even be tens of thousands of dollars.

  If you cannot wait until the end of your term to refinance, then you can avoid prepayment penalties with a blend and extend mortgage. Blend and extend allows you to refinance at any time without penalties, but the refinance rate will be based partially on your current mortgage rate. This means that the refinance rate will be higher than the rates currently being offered by your lender, if your current rate is higher, as blended mortgages combine both rates together.

It becomes clear when adding up these refinancing fees that mortgage prepayment penalties will be the largest cost to a refinanced mortgage, but some fees are also avoidable. Here are the total costs for refinancing your mortgage for a typical mortgage:

• Refinancing with your current lender at the end of your term:

  $1,120 to $1,920

• Refinancing with your current lender before the end of your term:

  $1,120 to $1,920 plus mortgage penalties

• Refinancing with a different lender at the end of your term:

  $1,320 to $2,270

• Refinancing with a different lender before the end of your term:

  $1,320 to $2,270 plus mortgage penalties

You should refinance your mortgage if you are able to refinance at a lower mortgage rate that covers the cost of any mortgage penalties for breaking your term early, along with other mortgage refinancing fees. You can also refinance if you are looking to borrow from your home equity. However, your savings from borrowing using a mortgage refinance should exceed the penalties for breaking the mortgage if you refinance mid-term.

For fixed-rate mortgages, most major banks charge a mortgage break penalty that is either three months’ worth of interest or something called an interest rate differential (IRD). IRD is the difference between interest on your current non-discounted mortgage rate and the interest on a mortgage for the same time period remaining on your mortgage term at the current posted rate. You can use a mortgage refinance calculator to calculate how much you can save or pay if you decide to refinance your mortgage.

Let’s say that you have a $500,000 fixed-rate mortgage at 3.00% for a five-year term, and you have two years remaining. You notice that mortgage refinance rates are currently as low as 2.00%.

If you choose not to refinance, you will pay $29,029 in interest at 3% for the next two years. If you do refinance, you will pay a total of $19,320 in interest at 2% for the next two years. This results in $9,709 in interest savings.

However, breaking your mortgage early will come with prepayment penalties. If the current posted rate for a 2-year fixed-rate mortgage is 2.5%, then the mortgage penalty, or the cost to refinance the mortgage, will be $5,000. This means that refinancing your mortgage will result in $4,709 in savings over two years.

Can you refinance your mortgage to consolidate debt?

Homeowners also refinance their mortgage for reasons other than getting a lower mortgage rate. A common reason is to borrow more money in order to pay off other debt or to consolidate higher-interest debt, which might even include second mortgages. To see whether a mortgage refinance makes sense, you will need to compare the cost of refinancing versus the cost of other loans that you could use instead.

Let’s consider a $500,000 mortgage on a $1 million home that currently has a mortgage rate of 3%. Your lender is also offering a mortgage refinance rate of 3%. You currently have $50,000 in credit card debt that has an interest rate of 20%, $100,000 in a personal loan at an interest rate of 7%, and a $50,000 car loan with a car loan interest rate of 5%.

With a mortgage refinance, you can borrow an additional $300,000 at an interest rate of 3%. That’s more than enough to cover your other $200,000 of debt that all have a higher interest rate. If you were to not refinance your mortgage and continued to keep these other debts as-is, you will be paying:

• Credit Card

  $50,000 at 20% per year will be $10,000 interest paid in one year

• Personal Loan

  $100,000 at 7% per year will be $7,000 interest paid in one year

• Car Loan

  $50,000 at 5% per year will be $2,500 interest paid in one year

Combined, you will be paying $19,500 just for the interest from these debts in one year. How much can you save if you refinance to pay off these debts?

• Mortgage Refinance

  You can borrow $200,000 to pay off these debts at a 3% interest rate. You will be paying roughly $6,000 interest in one year.

• Mortgage Refinance Costs

  A mortgage refinance will cost between $1,000 and $2,000, plus any mortgage penalties. Assuming that you refinance at the end of your term, this refinance might cost $2,000.

By refinancing your mortgage to pay off higher-interest debt, you can save $13,500 per year from interest savings, after paying $2,000 upfront to refinance.

Should I refinance my mortgage to pay for home renovations?

Home renovations and home improvements can add value to your home and increase your enjoyment of your home. A mortgage refinance would make sense to pay for home renovations if you expect your renovations to cost a sizeable amount. That’s because the cost of refinancing, which is around $2,000, might mean that a refinance would not make sense for smaller renovations.

For example, perhaps you’re looking to renovate your kitchen, which on average costs around $30,000. It wouldn’t make much sense to refinance your entire mortgage and pay $2,000 in fees just to borrow $30,000. The fees alone would cost 6.6% upfront, let alone your mortgage refinance rate.

For larger home renovations, a refinance would allow you to borrow a large amount of money at a low, fixed mortgage rate.

Alternatives to Refinancing for Smaller Projects

If you’re only looking to borrow a small amount, such as to pay for a small renovation project or to pay off a small credit card bill, then a home equity line of credit (HELOC) would be a great alternative to a refinance. A HELOC is just like a refinance in that you can only borrow up to 80% of the value of your home, but it differs in that you can borrow and repay freely without having to pay fees each time you borrow. This is great for homeowners that want a line of credit that is easily assessable and easily payable. However, HELOC rates are higher than mortgage refinance rates. HELOC rates are also usually variable rates, which means that your interest rate will not be fixed, unlike a mortgage refinance that can have a fixed rate.

Another alternative to refinancing would be home equity loans. Home equity loans are second mortgages that allow you to borrow money on top of your existing primary mortgage. Some lenders, particularly private mortgage lenders, allow you to borrow a larger amount with a home equity loan, such as up to 90% or 95% of your home’s value. However, second mortgages and home equity loans have higher interest rates.

A mortgage renewal is done at the end of your mortgage term, with the most popular term being five years. Most homeowners will not be able to pay off the full amount of the mortgage at the end of their term, which means that they will either need to renew, refinance, or switch.

A mortgage renewal is when you keep the same terms as your original mortgage, and at the same mortgage lender. Although your mortgage rate can change, you will not be able to increase the amount of your mortgage to borrow more money.

A mortgage refinance can be done at any time, not just at the end of your term. You can take out money to be used for things such as debt consolidation. While you will be charged penalties for refinancing before your term is up, you can still refinance at the end of your term. Waiting until your term ends will allow you to refinance your mortgage without any additional penalties.

A Home Equity Line of Credit (HELOC) is similar to a mortgage refinance in the sense that you can borrow your home equity, however, there are major differences between these two products.

A HELOC is a revolving account that allows you to borrow money at any time. On the other hand, a mortgage refinance would be a one-time event where you receive a lump-sum amount.

HELOCs also have different credit limits, where you can only borrow up to 65% of the home’s value if you have no mortgage, or up to 80% when combined with a mortgage.

HELOC rates are variable, while refinance mortgage rates can be either fixed or variable. If you choose a fixed refinance mortgage rate, you will be able to lock in a rate. Variable HELOC rates mean that you will be paying more interest if interest rates rise. However, some HELOC lenders allow you to convert some or all of your HELOC into a fixed term loan. This lets you lock-in an interest rate. Refinance mortgage rates are also generally lower than HELOC rates.

The mortgage stress test is conducted whenever you apply for a new mortgage. A mortgage refinance involves a new mortgage, which means that your mortgage refinance lender will require you to pass the stress test in order to be approved for the refinance. If you’re borrowing more money by accessing your home equity, your monthly mortgage payments will increase. This can make it harder to pass the stress test. If your mortgage is being refinanced at a lower interest rate, this will lower your mortgage payments, which will make it easier to pass the stress test. Borrowers with a bad credit score might find it difficult to be approved for a mortgage refinance from a major bank. Alternative mortgage lenders, such as B-lenders and private lenders, can be an alternative for bad credit borrowers looking to borrow more money but were denied a mortgage refinance.

A mortgage refinance is best suited for homeowners that have home equity and are looking to borrow a large amount at a fixed rate. This allows homeowners to borrow money cheaply, but this would only be the case if the amount being borrowed is significant enough or if current mortgage rates are low enough to offset the costs of refinancing.

For borrowers that need quick access to money, or need to borrow small amounts at a time, a mortgage refinance might not be the best method to borrow money. Applying and being approved for a mortgage refinance can take time. The costs of a mortgage refinance will also deter those looking to borrow a small amount.

Some pros and cons of a mortgage refinance include:

Does a mortgage refinance require an appraisal?

Yes, a mortgage refinance usually requires an appraisal. Since the amount that you are eligible to borrow in a mortgage refinance depends on the value of your home, most mortgage lenders will require a home appraisal to determine your current home value.

Does it make sense to refinance your mortgage to invest?

Low interest rates can make it very enticing to use your mortgage to invest, but does it make sense? Let’s look at a $1 million home that currently has a $300,000 mortgage at a mortgage rate of 3%. You can borrow up to an additional $500,000, which your lender is offering at a refinance rate of 3% as well.

In order for you to break even, your investments will need to return at least 3% a year, every year, in order to pay your additional mortgage interest. What investments will return 3% or more a year?

5-year Government of Canada bond yields give a return that’s usually far below mortgage interest rates, which is based on how mortgage rates are determined, while savings accounts and GICs also usually have low interest rates.

In order to beat the 3% interest that you’re paying, you will need to invest in riskier investments. On average, the stock market returns over 6% a year. If you borrow $500,000 by refinancing at 3% and you invest in the stock market, you won’t have much room for error. Borrowing to invest is very risky, and with a mortgage refinance, you are putting your home at risk if you can’t pay it back.

If the stock market does return 6%, then you’ll earn about 3% per year on your $500,000 investment. This would amount to $15,000 in profits every year after paying for interest, but this gain will certainly not be stress-free!

Other alternative real estate investments that you can fund with a mortgage refinance include buying investment and rental properties, buying a pre-construction condo, or even becoming a private mortgage investor. ETFs like REITs are a hands-off way to invest in real estate too. You’re not limited to just real estate investments either. Stocks, bonds, and other investments are possible, as the funds that you get from a refinance usually aren’t restricted in use.

Best 5-Year Mortgage Refinance Rates

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Is it hard to get approved for a mortgage refinancing at a bank?

It's harder to be approved for a mortgage refinance when compared to a mortgage renewal. In Q2 of 2022, 85.6% of same-lender mortgage refinances were approved according to the CMHC which means that 14.4% of refinancing applicants were denied. In comparison, only 3.3% of mortgage renewals were denied in 2020.

What alternatives are there for seniors?

Seniors with limited income that are looking to borrow money may want to consider a reverse mortgage instead. Reverse mortgages don’t require borrowers to have any income, and instead, reverse mortgages will provide borrowers with a steady stream of income. On the other hand, a mortgage refinance requires borrowers to have enough income to qualify and afford their mortgage payments. However, just like mortgage refinancing, a reverse mortgage requires borrowers to have equity in their home.