Mortgage Refinancing

Mortgage refinancing replaces your existing home loan with a new mortgage—usually larger, often at a new term, rate, or both. The new funds first pay off the old mortgage; any extra proceeds (called “equity take-out” or “cash-out”) are deposited to your account for renovations, debt consolidation, investments, or other goals. You can refinance with the same lender (a “blend and extend”) or move to a new one (a full switch). Because refinancing restarts the amortization clock and may trigger penalties, weighing the math carefully is essential.

Why Homeowners Refinance

Lower Interest Rate. Dropping even 0.75-1.00 % can carve thousands off lifetime interest, especially early in the amortization.

Shorten or Lengthen Amortization. Moving from 30 to 20 years speeds equity-build; stretching to 30 can ease monthly cash-flow during tight periods.

Cash-Out for Large Expenses. Renovations, tuition, business start-ups, or consolidating high-interest debt at mortgage-level rates.

Switch from Variable to Fixed (or vice-versa). Lock in stability before rates rise, or pivot to variable when you expect cuts.

How Much Can You Refinance?

• Prime (“A”) lenders cap the new mortgage at 80 % loan-to-value (LTV).
• Alternative lenders may go to 85 % at higher rates or shorter terms.
• Insured (“high-ratio”) mortgages cannot increase their insured balance; you must switch to a conventional loan at ≤ 80 % LTV.

Penalty vs. Savings Calculation

Breaking a fixed-rate mortgage mid-term incurs the greater of three months’ interest or the interest-rate differential (IRD). Before refinancing, calculate:

• Total penalty (ask your current lender for an exact quote).
• Legal + appraisal fees (≈ $1,000–$1,800).
• New rate savings over the remaining term.

If savings exceed costs within the current term, refinancing makes financial sense; if not, consider waiting until the maturity date or using a second mortgage/HELOC for equity needs.

Refinance Qualification Checklist

• Equity: New mortgage ≤ 80 % of appraised value.
• Stress Test: Qualify at the greater of contract rate + 2 % or the Bank of Canada benchmark (5.25 % today).
• Credit Score: 680+ for best rates; alt lenders accept 550–679 at higher cost.
• Income: Stable salaried/hourly or two-year self-employed average; debt-service ratios GDS ≤ 39 %, TDS ≤ 44 %.
• Property: Standard urban homes simplest; rural, condo hotel, or mobile homes may require alt lending.

Step-by-Step Refinancing Process

1. Request payout statement & penalty quote from current lender.
2. Gather documents: ID, pay stubs, T4s/NOAs, current mortgage statement, property-tax bill.
3. Apply with new lender/broker; authorize credit pull.
4. Appraisal ordered; insurer approval if needed.
5. Receive commitment letter: new rate, term, payment, cash-out amount, closing costs.
6. Lawyer/notary registers new mortgage, pays off old one, and disburses any remaining proceeds.

Costs & Rates (2025 Snapshot)

• Prime 5-yr fixed refinance: 4.7 % – 5.1 %
• Prime 5-yr variable: Prime − 0.60 % (≈ 6.60 %)
• Penalty: 3 mos interest or IRD (average $2,000–$8,000 on $400k balance)
• Appraisal: $350 – $500 | Legal & title: $900 – $1,200

Pros & Cons

Pros: Lower rate saves interest, access to large inexpensive cash, consolidate debts into one payment, reset amortization to fit goals.

Cons: Break-penalty costs, legal fees, restarts amortization (could pay more interest long-run), higher balance increases foreclosure risk if income drops.

Smart Refinancing Tips

• Blend & extend: some lenders let you keep part of your low existing rate blended with a top-up—often cheaper than a full break.
• Use prepayment privileges first: a lump-sum on current loan may slash balance enough that refinance penalty shrinks.
• Align new term with goals (e.g., 3-yr fixed if expecting early move or sale).
• Build in a 3-month emergency fund before adding new mortgage debt.

Frequently Asked Questions

How soon can I refinance after buying?
Immediately if equity and penalties allow, but most wait until at least 20 % equity or a compelling rate drop appears.

Will the CMHC insurance premium refund if I refinance?
No; high-ratio premiums are non-refundable once advanced. A refinance converts to a conventional loan without CMHC coverage.

Can I roll the penalty into the new mortgage?
Yes—if total CLTV remains ≤ 80 %. The penalty becomes part of the new principal.

Do I have to use the same lawyer?
Any licensed real-estate lawyer/notary in your province can close; some lenders pay basic legal costs on straight transfers.

Is refinancing the same as a renewal?
No. Renewal happens at term maturity with the same lender and no penalty. Refinancing breaks the current mortgage or increases balance before maturity.