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Insights & advice

Mortgage refinancing

November 2022 – 15 min read

Key takeaways

  • Refinancing involves paying off your mortgage and replacing it with a new one with different terms.

  • There are many reasons people choose to refinance, like paying for renovations, another property or other savings goals.

  • There are many things to think about when deciding to refinance, like the amount of equity you can access, early exit penalties and renewing your mortgageOpens in a new window. 

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What’s in this article?

What is refinancing?

Refinancing a mortgage means paying off your current mortgage by replacing it with another one. 

Refinancing involves using the equity that you have built up in your property to free up cash. This cash could be used for just about anything, like home renovations or another big expense, such as a car,Opens in a new window college or university tuitionOpens in a new window or starting a new businessOpens in a new window. In some cases, people can use built up equity through re-financing to pay off higher-cost debt, such as credit card debt.

The process of re-financing your home is relatively straightforward – in fact, the application is like qualifying for a mortgageOpens in a new window.

When should you refinance?

A common reason to refinance is to get a lower interest rate.

When rates changeOpens in a new window, you could consider refinancing to get a lower rate and in turn pay less in interest each month. While this is a common motivator, it’s not the only reason people consider refinancingOpens in a new window. It may also be an option any time you may need to access your home equity, or in other words, reduce monthly debt payments to free up some money for your next major purchase or project.

This might include: 

Refinancing can be an option any time you need to pay for a big expense, but would rather not touch money tied up in other investments such as a Registered Education Saving Plan (RESP)Opens in a new window or Registered Retirement Savings Plan (RRSP)Opens in a new window.

How much could you receive?

Under current regulations, you could borrow up to 80% of the appraised value of your home.

From that amount, you must deduct:

  • The balance on your mortgage
  • Your total home equity line of credit (HELOC) amount (if applicable)
  • Any other loans secured against your home

Essentially, the more money you’ve paid into your mortgage, the more cash you can access through refinancing.

  • Let’s look at an example. Let’s say your home is worth $850,000, and let’s assume that you’ve been paying down your mortgage for some time, so that you only have about $500,000 left. In this scenario, 80% of the value of your home would be $680,000 and because you still have $500,000 left to pay, this means you can access about $180,000 in equity.

This example is for illustrative purposes only. Situations will vary according to specific circumstances.

Final things to think about

If you’re thinking about refinancing, there are some factors to weigh before making your decision:

The impact on your credit score

When you refinance your mortgage, you’re essentially paying off your existing loan and taking out another. Any time you apply for a loan, your lender will make a hard credit enquiry (or “pull”), which will impact your credit score, and be visible to other lenders. However, keeping up with regular mortgage payments will help strengthen your credit score. This impact is something to keep in mind if you’re thinking of applying for any other loans soon, such as a credit card of line of credit.

Prepayment penalties

Your lender may charge you a pre-payment penalty for refinancing. Depending on how large this penalty is, it may not be financially worth breaking your contract, as the amount you’ll receive will be much less after the penalty.

Other options for your mortgage

It may be that after thinking about refinancing, you’re not sure it’s the right move for you. In this case, there may be other options to consider, such as renewing your mortgageOpens in a new window instead.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. 

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