Renewal and Refinancing #Mortgage Basics
Renewal and Refinancing #Mortgage Basics
How to Refinance Your Mortgage in Canada
Table of contents
Notice: Effective November 21, 2024, mortgage transfers between lenders will be exempt from requalification. Transactionally insured (those who originally purchased with less than 20% downpayment) and uninsured mortgages (without increasing mortgage balance or amortization) will no longer be required to stress test when changing lenders at maturity. Going forward, only new purchase and refinance mortgage applications must be qualified through the stress test.
Are you a Canadian homeowner interested in redefining your financial future? Refinancing your mortgage could be the beneficial path you’ve been seeking. With an ever-evolving Canadian economy and rapid fluctuations in interest rates, understanding how to refinance your mortgage couldn’t be more timely.
Regardless of why you’re interested in refinancing your mortgage, this post will help you understand the process and costs involved and will help you weigh them against the potential benefits of doing so for your financial situation.
Key Takeaways
- Borrowers refinance to take advantage of lower interest rates, access equity to consolidate debt, finance renovations, buy an investment property, or for more favourable mortgage terms and conditions.
- Depending on your current mortgage, refinancing may mean you incur a prepayment penalty for breaking your mortgage early.
- Some alternatives to refinancing may be more suitable depending on your situation.
What Is a Mortgage Refinance?
Refinancing involves breaking your current mortgage and replacing it with a new one. There are several reasons why you might consider refinancing your mortgage. The most popular ones include accessing the equity in your home to consolidate high-interest debt, fund renovations, purchase another property, access a better interest rate, or extend your amortization to lower your payment.
What Is Equity and Loan-To-Value (LTV) Ratio?
Lenders set borrowing amounts based on your loan-to-value (LTV) ratio. The more equity you have in your home, the lower your LTV.
Borrowers often refinance once they’ve built up a substantial amount of equity. Your equity can be accessed through a lump sum equity take-out (ETO) in cash that a new mortgage would provide (typically up to 80% of the home’s appraised value).
If your current mortgage has been paid down significantly upon qualifying, you could access up to 80% of the home’s value through a refinance.
- For example, if your home is worth $500,000, and you have $250,000 remaining, refinancing with a new mortgage could let you borrow up to $400,000. This means you could access $150,000 as an equity take-out (ETO) when refinancing your mortgage.
How to Use the Mortgage Refinance Calculator
Our mortgage refinance calculator is a great way to weigh whether a refinance is worth breaking your mortgage early (and, just maybe, paying the prepayment penalty for doing so).
Simply input what you want from a refinance (lower payments, access equity, or change amortization), the amount remaining on your current mortgage and the value of your home.
Our calculator will help you understand the rates available, given your remaining balance and how much equity you can access.
Is Refinancing Worth It?
Refinancing can be worthwhile in many cases, but doing a cost-benefit analysis is important.
You should weigh the pros of accessing equity or freeing up additional cash flow for a specific purpose versus the cons of the penalty you’ll pay to break your mortgage early.
Research current mortgage rates and see if there are cost savings you can realize by refinancing.
If penalties are particularly high, perhaps waiting a little longer to be closer to the end of your current mortgage term may make more sense for your situation.
Costs of Refinancing
Refinancing your mortgage comes with a cost. Since refinancing means you are likely breaking your mortgage early, it will involve a prepayment penalty.
Depending on your mortgage type, your prepayment penalty will be either 3 months’ interest or an interest rate differential (IRD), whichever is higher.
Even if you refinance when your renewal is due and do not break your term early, you will still need to pay for legal fees, a home appraisal and other fees.
Switching lenders, for example, will mean you likely incur a mortgage discharge fee, which covers replacing your old lender from your property title with the new one.
Mortgage Refinancing Costs
| Fee Type | Cost |
|---|---|
| Prepayment Penalty |
Refinance before the term ends: This will depend on your lender but is typically the highest of either 3 months of interest or the IRD. Refinance at renewal: None |
| Mortgage Discharge Fee | $250 – $400 (depending on your lender) |
| Mortgage Registration Fee | $50 – $150 (depending on your province) |
| Home Appraisal | $300 – $500 (fee range depends on your property’s location, the available number of assessors, travelling distance to the property from the assessors office, type of home, and type of appraisal) |
| Legal Fees | $750 – $1,500 (potentially more if adding or removing someone from the title) |
Reasons to Refinance Your Mortgage
Here are some of the most common reasons why you might consider refinancing your mortgage:
Get a Lower Interest Rate
If interest rates are lower than when you initially secured your mortgage, it may make sense to refinance. Often, the new lower rate could save you more money over time, even when factoring in the cost of paying a penalty to break your current mortgage contract early.
Change Your Amortization
If your payments have become unmanageable, changing your amortization can help you lower your mortgage payments and free up your cash flow. The longer you extend your amortization, however, will mean a higher interest carrying cost over the life of the mortgage.
Accessing the Equity in Your Home
In a healthy housing market, your equity increases as you pay your mortgage. If you decide to access some of the equity in your property, refinancing is a valuable way of doing so. With a refinance, you can access some or all of the built-up equity in your home and then use that money toward home renovations, purchasing another home, your child’s education, starting a business, or any other purpose.
Refinancing to Consolidate Debt
Generally, mortgages have lower interest rates than other forms of debt, like credit cards, unsecured loans, or second mortgages. A popular reason to refinance is to use some of the equity in your home to consolidate and pay off higher-interest debts. That way, you’ll only have one lower-interest monthly payment rather than multiple high-interest debt payments each month, saving you money in the long run.
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How to Refinance Your Mortgage
Refinancing involves breaking your current mortgage and applying for a new one. You must apply for the mortgage as you did for your original loan. Here’s an overview of what the refinancing process looks like:
Check Whether a Refinance Makes Sense for You
Weigh your refinancing costs against the benefits of potentially getting a lower rate or accessing equity. You can use our mortgage refinance calculator to check whether refinancing makes financial sense for you right now or whether it’s worth exploring other alternatives.
Compare Different Rates
Once you’re ready to refinance your mortgage, you can compare different rates and find the one that’s right for you. This could mean sticking with the same lender or moving to a new one altogether. Compare rates and terms to ensure you choose the best option for your needs.
Apply for Your New Mortgage
Once you’ve found what you’re looking for, you must complete a new mortgage application. This process is similar to the one you completed to finance your original mortgage and similarly requires the lender to assess your finances by looking at your employment, income, and credit.
You’ll also need to arrange a home appraisal to determine the value of your property in the current market and complete what’s known as the mortgage stress test. This is designed to see whether you can keep up with your mortgage payments if interest rates were to increase. All federally regulated lenders must perform a stress test for any new mortgage.
Refinance Considerations: Stress Test & Bad Credit Scores
A mortgage stress test is carried out whenever you apply for a new mortgage with a federally regulated lender, either when you switch lenders or refinance. The stress test checks to see if you can still afford your mortgage repayments at a higher interest rate should rates increase. Currently, the stress test rate is either your interest rate + 2% or the benchmark stress test rate of 5.25%, whichever is higher.
Remember that if you’re refinancing to borrow more money from your home equity, your monthly payments will increase. This can make it harder to pass the mortgage stress test. However, if you’re refinancing at a lower rate, this could make it easier to pass the stress test—even more so if you’re also increasing your amortization!
Additionally, if you have a poor credit rating, you may struggle to be approved for a mortgage refinance from a major bank. You have a few options if you were denied a mortgage refinance based on bad credit. You could work to rebuild your credit and wait to refinance or renew. However, if you’re pressed for time, you could refinance with subprime lenders at much higher rates.
Alternatives to Refinancing Your Mortgage in Canada
If you’ve determined that a refinance doesn’t make sense for your situation, you can explore a few alternatives.
Renew Your Mortgage
If you don’t think the costs of breaking your term early is worth it for a refinance, you may simply want to wait until it’s time to renew your mortgage.
Blend & Extend
With a blended mortgage, you combine one mortgage rate with another and create a weighted average based on rates and balances between the two. A blend-and-extend mortgage involves combining your current mortgage rate with another and extending the length of your term. Depending on your lender, concurrently, you may be able to return to your original amortization if you have a collateral charge mortgage.
Restructure Your Mortgage
A restructure allows you to take your current mortgage and change the terms to make payments more affordable. You can do this by restructuring to a lower interest rate, extending your term, splitting your mortgage into two separate ones, combining a HELOC balance into a mortgage, or extending your amortization. Depending on your lender, restructuring may or may not be an option for your situation.
Get a Second Mortgage
A second mortgage is taken out on top of your primary mortgage, typically at a different lender. Generally, second mortgages have higher interest rates than a HELOC or mortgage refinance and are secured against the equity in your home. This will not affect the terms of your first mortgage.
However, your first mortgage lender will need to agree to a second mortgage behind them. Second mortgages are a fairly popular way to access equity for debt consolidation or home improvements. A second mortgage can be set up as a HELOC or a term loan (mortgage).
Frequently Asked Questions on Mortgage Refinances in Canada
Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.
How much will it cost to refinance my mortgage?
The cost to refinance will depend on how much of your original mortgage term remains, whether you are switching lenders, and the cost of other fees required. Depending on your penalty, appraisal and discharge fees, you could pay anywhere from a few hundred to thousands of dollars.
What options do I have if the cost to refinance exceeds potential savings?
If a refinance doesn’t make sense for your situation, there are a few options available that could work depending on your reason for wanting to refinance. It’s important to note that these alternatives may still come with additional fees and penalties, so it’s important to understand the total cost involved in each option before proceeding.
If you can wait until your mortgage comes up for renewal, this would help you avoid prepayment penalties. If affordability is the reason for refinancing, you could blend and extend or restructure your mortgage. If you want to access the equity in your home, then a second mortgage could be a viable solution.
Will refinancing negatively affect my credit score?
As with all mortgage approvals, a refinance will require a hard credit check. Hard credit checks do reduce your credit score in the short term. However, once your replacement mortgage is in place and you make your payments on time, your credit score should start increasing once again.
Final Thoughts
Refinancing involves breaking your mortgage terms and conditions and obtaining new ones. A mortgage refinance can be an excellent strategy for accessing your home’s equity or finding a lower interest rate. However, depending on your lender, mortgage terms, the time left on your current mortgage, and other factors, refinancing costs may outweigh any benefits. Refinancing can still be worthwhile if you want a new mortgage contract that better suits your needs and lifestyle.
Are you considering a refinance? Speak to one of nesto’s experienced mortgage experts. They can help you weigh the pros and cons and complete a savings cost analysis to determine if a refinance is right for you.
Why Choose nesto
At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.
nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.
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