Mortgage refinance

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Content last updated: April 17, 2020

A mortgage refinance is when you break your current mortgage and start a new one, either with the same or a new lender. You might refinance your mortgage to get a lower rate, access equity in your home, or consolidate your debts. Breaking your mortgage early will incur a large prepayment penalty though, so mortgage refinancing is risky. Make sure you do your research.

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Reasons to refinance your mortgage

Getting a lower interest rate isn’t the only reason to refinance a mortgage. Mortgage refinancing can also be used to access equity in your home, and to consolidate your debts.

1. Getting a lower interest rates

Refinancing to get a lower interest rate can save you a lot of money over time, depending on the prepayment penalty and the size of your outstanding mortgage. If you hold a variable rate mortgage, then expect to pay a penalty of three months interest, and if you hold a fixed rate mortgage, then you will pay the greater of three months interest or interest rate differential penalty (IRD). Don’t let penalties deter you - understanding the numbers helps you calculate whether a refinance will save you money.

2. To access equity (cash) in your home

By refinancing your mortgage, you may be able to access the equity in your home. You could potentially access up to 80% of your home's value, less any outstanding debt. That’s extra money for investment opportunities, home renovations, or your children’s education. There are several ways to access this equity including breaking your mortgage, taking on a home equity line of credit (a HELOC), or blending and extending your mortgage with your current lender.

3. Refinancing to consolidate debt

If you have enough equity in your home, you might be able to use built-up equity in your home to pay-out high-interest debt through a mortgage refinance. For example, if you have a number of outstanding debts, such as a car loan, a line of credit, or credit card bills, you may be able to consolidate this debt through the variety of mortgage refinance options available.


Pros and Cons of a mortgage refinance

A mortgage refinance is a major financial decision that shouldn’t be made lightly. While a mortgage refinance has the potential to save you thousands of dollars over your mortgage term, there are inherent risks associated with refinancing that you need to be aware of. The table below summarizes the pros and cons of mortgage refinancing.

Pros of refinancing Cons of refinancing
Potential to get a lower interest rate and save money. Penalties may be higher than the savings.
Can consolidate debt with a lower overall rate. Consolidating debt removes an incentive to pay it down faster.
Access to equity in your home. Accessing equity puts you into more debt.
Allows you to swap to a variable or fixed rate. Switching rate type is not always in your best interests.

How to refinance your mortgage

There are several ways to refinance a mortgage. These include: breaking your mortgage contract early, taking out a home equity line of credit, or blending and extending your mortgage with your current lender.

1. Break your existing mortgage contract early

You would consider breaking your mortgage early if you wanted to obtain a lower interest rate or access equity from your home. In this case, you eliminate your existing mortgage and take on a brand new one with any lender. Breaking your mortgage will incur a prepayment penalty from your bank, which is normally equal to around three months worth of interest charges. If you can justify the cost of the prepayment penalty with your new mortgage rate, then breaking your mortgage can still be worth it.

2. Add a home equity line of credit (HELOC)

A home equity line of credit gives you access to the equity in your home, at your own discretion. A HELOC works a lot like a credit card account, but because it’s a secured loan (by the equity you have in your home) the interest rates are much lower. If you do take money from it, you’ll be responsible for monthly interest-only payments on the outstanding balance. You can access a home equity line of credit through your existing lender and a small subset of other lenders.

3. Blend and extend your existing mortgage

Your existing mortgage lender may offer you a ‘blended rate’; essentially, a ‘blend’ of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage.


Costs of refinancing your mortgage

The cost to refinance your mortgage depends on the strategy you use to access equity or lower your interest rate. No matter which strategy you use you will always incur legal costs, as a lawyer must change the financing on title. The good news is if your mortgage balance is greater than $200,000, many brokers and/or lenders will cover this cost.

If you are breaking your mortgage in the middle of your term to access equity or lower your interest rate, your lender will charge you a prepayment penalty. For fixed mortgage rates this penalty is the greater of three months interest or the interest rate differential payment (IRD). For variable mortgage rates this is simply three months interest.


Where to learn more about mortgage refinancing

To truly understand if it’s a good idea to refinance your mortgage, you should speak to a licensed Canadian mortgage broker. They’ll be able to assess your personal situation at no cost to you, and help you understand what your options are. If you’re ready to refinance then they can also find you the best deals and guide you through the process.

Calculate your Mortgage Penalty

Thinking about breaking your mortgage early? Let Ratehub.ca help you calculate your refinance penalty.