Mortgage Refinancing

Why do people refinance?

Four reasons account for almost all of it. Consolidating high interest debt into one lower payment. Funding a renovation, particularly one that adds value. Freeing up a down payment for a second property. And restructuring after a life change, most often a separation where one party buys out the other.

A fifth reason, refinancing purely to chase a lower rate, is less common than people assume, because the penalty to break usually eats the saving. It happens, but only when the gap is wide and the remaining term is short.

How much can you take out?

Eighty percent of the appraised value, less whatever is already registered on title. Take a home appraised at $900,000 with $400,000 owing. Eighty percent is $720,000, so roughly $320,000 is accessible before costs.

The exception: adding a secondary suite. Since January 2025 the default insurers offer an insured refinance to as much as ninety percent of the value the home will have once a self-contained rental unit is added, such as a basement apartment or a laneway house. The property must be worth under $2 million, you or a close relative must live in one of the units, the finished home can have no more than four units, the suite has to comply with local zoning, and the amortization can run to thirty years. The money is for building the suite, not for clearing other debt. For an owner sitting on a house with the layout for a unit, it is the cheapest route to building one.

Two things move that number. The appraisal, which is the lender's opinion of value rather than yours or your neighbour's sale price. And anything else registered against the property, including a HELOC you are not using, because the limit counts even when the balance is zero.

What does breaking your mortgage cost?

Your lender calculates both three months of interest and an interest rate differential, then charges whichever is greater. On a variable mortgage it is almost always the three month figure and it is usually modest. On a fixed mortgage the differential can be brutal.

The reason is how the calculation is done. Big banks generally use posted rates and a discount retention method that produces a much larger number than the arithmetic most people expect. Monoline lenders typically use a method that produces a smaller one. Two borrowers in identical positions at different lenders can face penalties that differ by many thousands of dollars.

Ask your lender for the exact figure in writing. Do not plan around an estimate, including ours.

Working out whether it is worth it

Add the penalty, the legal fees, the appraisal and any discharge charges. That is your cost. Then work out what the new arrangement saves you each month. Divide one by the other and you have the number of months until you are ahead.

Then apply the only question that matters: will you still own this property, on this mortgage, past that date? If you are consolidating debt and freeing up hundreds of dollars a month, break-even often arrives inside two years and the answer is obvious. If you are moving next spring, it is equally obvious the other way.

You will have to requalify

A refinance is underwritten from scratch. Income documents, credit check, debt ratios, and the federal stress test at the greater of your contract rate plus two percent or the 5.25 percent floor.

This catches people whose circumstances have changed since they last qualified. A move to self-employment, a reduction in hours, a new car loan, or a credit event will all show up. If a prime lender will not approve the refinance, that is not the end of it. Alternative lenders assess the same file differently, and our pages on alternative lending and private mortgages cover what that looks like.

When a refinance is the wrong tool

• Your existing rate is well below what is available now. Breaking it means giving up that rate on the whole balance, not just the new money. A second mortgage leaves the first alone.
• You need the money in stages rather than all at once. A HELOC charges interest only on what you actually draw.
• Your renewal is close. At maturity you can move lenders with no penalty at all. If you are within a few months, waiting is usually free money. See our renewal page.
• The penalty exceeds the benefit. Sometimes the honest answer is to do nothing, and we will tell you when that is the case.