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What is a Mortgage Refinance in Canada?
Mortgage refinancing involves replacing your existing mortgage with a new mortgage, often with different terms and rates. With refinancing, you pay off your current mortgage balance. At the same time, your current or new mortgage lender provides funds secured by the equity you have built up in your home. Refinancing opens up new mortgage terms and flexibility while allowing you to tap into substantial equity.
The refinancing process is similar to getting a new mortgage:
- Credit check: Your income, debts, and credit score will be assessed.
- Documentation: You’ll provide recent pay stubs, tax documents, mortgage statements, property tax bills, and bank statements.
- Home appraisal: An appraisal determines your home’s current market value.
- Mortgage stress test: You’ll be qualified at a benchmark rate (typically 5.25%) to ensure you can handle higher rates.
Refinancing with a new lender also involves fees like discharge, transfer, and legal fees. Your new mortgage must be registered on the title.
What are the top reasons for refinancing in Canada?
The first step in deciding whether you should refinance is to establish your goals.
You want to Access Your Equity for Cash
You’ve built up home equity over time – Access up to 80% of your home value through cash-out refinancing at low rates. Any funds you receive are tax-free.
You want to Consolidate Debts
Refinancing lets you consolidate high-interest debts like credit cards or loans into your lower mortgage rate, reducing overall interest costs. This can free up cash flow to pay off debts faster.
You look for Lower Interest Rates
Simply reducing your mortgage term may result in a better rate. A better rate and fewer years of repayments mean significant savings in the long run.
You want to change Mortgage terms
Does your term or type of mortgage no longer fit your needs? Refinancing allows you to adjust to fixed or variable rates and change amortization periods.
How to Refinance Your Canadian Mortgage?
Break Your Mortgage
This involves paying out your existing mortgage in full before its maturity date. This option gives you the most flexibility regarding a new lender, loan amount and terms.
HELOC
A HELOC lets you remove a revolving line of credit secured against your home equity while keeping your current mortgage untouched. Your lender advances funds up to 65% of your home equity.
Blended Mortgage
Blended mortgage (Blend and Extend & Blend to term) combines your current mortgage rate with a new lower rate on any extra funds you borrow above your current mortgage balance.
What Are the Costs of Refinancing?
Refinancing comes with fees and closing costs. Being aware of these expenses can better prepare you for the refinancing process.
- Appraisal Fee: $200 – $500 to value the property.
- Legal Fees: $500 – $1500 for a lawyer to review documents and register the mortgage.
- Title Insurance Fees: $150 – $300 for title search and insurance.
- Mortgage Discharge Fee: $300 – $500 to discharge current mortgage. Only if switching lenders.
- Prepayment Penalties: Hundreds to thousands to break your mortgage early. Depends on the mortgage type and lender.
You’ll also pay higher interest if you extend your amortization period. Shop rates and compare costs to alternatives.
Refinancing Alternatives to Consider
While refinancing is one option, consider alternatives for accessing equity or changing your mortgage.
Home Equity Loan
With a home equity loan, you take out a one-time fixed lump sum separate from your current first mortgage. Alternative and private lenders often offer it.
Mortgage Renewal
Rather than incurring fees and penalties associated with refinancing, you can simply negotiate a lower rate or different terms with mortgage renewal when your existing mortgage matures.
Wait for Rate Decrease
If you have prepayment restrictions and your mortgage term is still long, consider being patient and waiting for lower rates before refinancing.
What are the Risks of Refinancing To Be Aware Of?
While refinancing can benefit some borrowers, be sure to consider these key risks:
- Extending amortization restarts your payments: Paying interest over more years costs more in total.
- Credit Score Drop: A hard credit check and a new mortgage can lower your score temporarily.
- Withdrawing too much equity erodes your ownership stake: Don’t take out more than you need.
- Refinancing can tempt overspending on depreciating assets: Use funds only for investments with lasting value.
- Missed mortgage payments can lead to foreclosure: Ensure you can afford the new payments.
- Refinancing may not mean lower rates long-term.
Our Refinance Guide
Explore our Guide to Refinancing to learn about the optimal times to refinance, how to access your home’s equity, and other savvy strategies.
FAQs
What are the benefits of refinancing your mortgage in Canada?
The main benefits are tapping home equity, getting a lower interest rate, consolidating high-interest debts into your mortgage, and changing your mortgage type or amortization period.
Can you refinance with a different lender in Canada?
Yes, you can refinance your mortgage with a new lender. This involves paying out your old mortgage in full, incurring discharge fees and early repayment penalties.
How much equity can you get from refinancing in Canada?
When refinancing, you can access up to 80% of your home’s current appraised value, less the remaining principal on your outstanding mortgage.
What is the difference between refinancing and renewing your mortgage?
Refinancing replaces your mortgage entirely with a new loan, terms and rate, while renewal is signing for a new term with your existing lender without discharging the mortgage.
Is refinancing better than a home equity line of credit (HELOC) in Canada?
Refinancing provides a lump sum at a fixed rate, while a HELOC has a variable rate but offers flexibility in accessing funds only as needed. Your goals determine which option is better.
Can you get cash back when refinancing your mortgage in Canada?
Yes, if your new mortgage amount exceeds your previous balance, the funds above your old principal are advanced to you in cash, up to 80% of your home’s value.
Is it better to refinance with your current lender or a new lender?
Staying with your existing lender avoids discharge fees, but a new lender may offer better rates and terms. Compare options to determine if the savings outweigh any fees associated with switching lenders.
Refinancing with Mortgage Experts
Given the intricacies involved, seeking expert assistance is highly recommended to refinance your home loan. At Best Mortgage Online, our broker will help determine if refinancing makes sense by:
- Explain available mortgage products to find your optimal loan
- Outline costs so you can weigh the tradeoffs
- Negotiate your best rate and transparent fees
- Simplify paperwork and guide you through the entire process
Let us match your new mortgage to your financial needs and goals. Start exploring your refinancing options with BestMO today!