Refinancing could save you thousands of dollars on your mortgage. It’s simple: You replace your current home loan with a new one with better terms. Many homeowners do this to get lower interest rates or change the length of their payments.
Applying for refinancing isn’t just about saving money each month. It’s about taking control of your financial future and making your mortgage work better for you.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
Quick Tips About Refinancing
- Refinancing means trading your old mortgage for a new one with better terms
- Most people refinance to lower monthly payments, get cash from their home, or pay off their loan faster
- You can choose from different refinancing types depending on what you need
- Refinancing can help combine debts into one simple payment
- Be careful about costs like loan fees and appraisals, which affect your savings
What Is Mortgage Refinancing?
Refinancing swaps your old home loan for a new one. It’s like trading in your car for a better model—the same house, better loan.
This switch can reduce your monthly payments or let you take cash from your home’s value.
Benefits of Refinancing
Many homeowners don’t realize how much refinancing could help them. Here’s why it might make sense for you:
Lower interest rates save you money every month. If rates drop from 6% to 5% on a $500,000 loan, your payment goes from $3,199.03 to $2,908.02. That’s $291 in your pocket every month!
Refinancing lets you withdraw cash from your home without selling it. The money isn’t taxed like income, which makes it better than other loans for big expenses.
You can also change your loan length. A shorter term means less interest paid over time, while a longer term lowers monthly payments.
Essentially, refinancing can put real money back in your budget and help you manage your finances better.
Renewing vs. Refinancing: What’s the Difference?
Mortgage renewal and refinancing both involve signing a new mortgage agreement, but they serve very different purposes.
Renewal = Continue your existing mortgage at the end of your term. Nearly automatic. You’ll get a renewal notice a few weeks before the end of your term, and if you agree to the renewal terms, that’s that.
Refinancing = Replace your mortgage with a new one, often with a different amount, rate, or structure. Can happen at any time, but has fees and often incurs penalties.
Renewing is typically fast and penalty-free. Refinancing gives you more flexibility and access to equity—but at a cost. Knowing when to renew and when to refinance can help you save money and meet your financial goals.
Renewing Your Mortgage
When your mortgage term ends (typically every 1 to 5 years), you’ll need to renew your mortgage if there’s still a balance owing. Mortgage renewal means signing a new term with your lender, often at a new interest rate. You’re not changing the amount you owe—just agreeing to a new deal to continue paying off the same loan.
At renewal time, you can:
- Negotiate a better interest rate with your current lender.
- Switch to a different lender offering better terms (this may involve a bit more paperwork).
- Adjust your payment frequency or amortization schedule.
Renewing is a routine part of Canadian homeownership, and most people do it several times over the life of their mortgage.
Mortgage renewal usually doesn’t involve fees, unless you’re switching lenders or making major changes.
Some lenders offer early renewal, offering you a better interest rate if you renew with them a few months in advance rather than going to a competitor.
Refinancing Your Mortgage
Mortgage refinancing, on the other hand, is more involved. You break your current mortgage contract before the end of the term and take out a new one—usually for a different amount or under different terms.
People refinance to:
- Access equity through a cash-out refinance.
- Consolidate high-interest debt.
- Lock in a better interest rate (though this may trigger a prepayment penalty).
- Switch from a variable rate to a fixed rate—or vice versa.
- Extend or shorten their amortization to change monthly payments.
Refinancing can happen at any time, not just at the end of a term. But because you’re breaking your mortgage early, you’ll likely face penalties such as three months’ interest or an interest rate differential (IRD), especially if your current rate is higher than today’s rates.
Understanding Home Equity
Home equity is the part of your house that you truly own. Think of it as your slice of the home ownership pie.
Home equity matters greatly when refinancing, especially if you want to take cash out of your home.
Home Equity and Refinancing
Home equity is the difference between your home’s current value and the amount you still owe on your mortgage.
For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, you have $200,000 in equity.
This equity is important when refinancing. With cash-out refinancing, you can borrow more than you currently owe and take the difference in cash. This money helps with home repairs, debt payoff, or college tuition.
You generally need to keep at least 20% equity in your home to be eligible for refinancing.
For example, with the $500,000 home with $200,000 equity, you could:
- Leave $100,000 in your home as 20% equity
- Take out a loan for $400,000
- Use the loan to pay off the $300,000 you owe on your old mortgage
- Take the $100,000 difference in cash
- Pay closing fees on the new loan
You’d then have a new $400,000 mortgage with different terms than your old one, plus a bunch of cash.
Your home equity works like a financial safety net. The more you have, the more options you get when refinancing.
Types of Refinancing
Different types of refinancing solve different money problems. Knowing which best suits your needs can help you make the right choice.
Rate-and-term refinancing lowers interest rates or changes how long you’ll pay. This option cuts your monthly payment or helps you repay your loan faster. You can also get a different kind of mortgage, such as switching from a variable rate to a fixed rate.
Cash-out refinancing lets you take money from your home’s equity. You get a check at closing that you can use for anything from home improvements to paying off credit cards.
Consolidation refinancing combines multiple debts into one loan. Instead of juggling several payments, you make just one. (It’s basically cash-out refinancing specifically to pay off other debts, especially high-interest ones.)
Pick the type that fixes your biggest money challenge.
Refinancing to Reduce Interest Rates
Refinancing to get a lower rate can save you serious money.
Even a small rate drop helps. Getting a 1% to 2% lower rate than your current one can save you hundreds each month. On a $300,000 mortgage, dropping from 6% to 4.5% saves about $260 monthly.
However, it’s important to factor in refinancing fees. The rate drop needs to be big enough that you save more by refinancing than you do by sticking with your current mortgage.
If refinancing triggers a prepayment penalty, you could be on the hook for thousands of dollars—even tens of thousands if you trigger an IRD penalty. It doesn’t help that an interest rate differential (IRD) gets bigger the lower the rate drops below your current rate.
Generally speaking, a drop of 2% is a good benchmark for looking at refinancing. But run your own numbers and ask your specific lender about fees.
Here’s an example using an online refinancing calculator:
Your original mortgage is $500,000 at a 6% rate, with an amortization period of 25 years. After 100 payments, your balance is at $405,931.32. Rates have since dropped by 2%, so you want to refinance to the 4% rate.
For simplicity’s sake, we’ll assume that the prepayment penalty is three months’ interest. That calculation looks like this:
(0.06 x $405,931.22 x 3) / 12 = $6,099.97
You’ll also have to pay closing costs on the new mortgage. Those are usually between $1,000 and $3,000, so let’s split the difference at $1,500.
Your expenses for refinancing are about $7,600, but your monthly payments will drop nearly $1,064 per month. Your refinancing expenses will pay for themselves in about 7 months.
This does technically increase the total amount of interest you’ll pay. If you stuck with your old mortgage, you’d pay about $233,877 in interest. With the new mortgage, you’ll end up paying about $234,653. That’s a difference of about $776.
If you’re planning on selling your home within the next 7–8 months, refinancing is definitely not worth it. If you keep these new terms for the rest of your mortgage, you’ll just have to ask yourself: is paying $776 more in the long run worth having over $1,000 extra per month now?
Of course, this also doesn’t factor in mortgage renewals. If you can renegotiate your interest rate when you renew, you can avoid paying prepayment penalties.
Cash-Out Refinancing
Cash-out refinancing is a way to turn the equity in your home into cash in your pocket. You refinance your mortgage for more than you currently owe, and you get the difference in a lump-sum payment at closing.
Most lenders limit borrowing to 80% of your home’s value. If your home is worth $500,000, you can typically borrow up to $400,000.
Let’s say your home is worth $500,000 and you owe $300,000 on your current mortgage. If you refinance for $400,000, you get $100,000 in cash. That money is yours to spend however you like—on home renovations, tuition, starting a business, or even investing.
Cash-out refinancing typically comes with a slightly higher interest rate than a standard refinance, but the trade-off is access to cash at a much lower rate than most personal loans or credit cards. It’s a good option if:
- You’ve built substantial equity in your home.
- You need access to funds and want a lower interest rate than other types of borrowing.
- You plan to stay in your home long enough to recoup the closing costs.
Here’s an example of the potential savings:
Let’s say you need $100,000 in cash right now. You could do a cash-out refinance on a $300,000 mortgage at 6% interest, or a personal loan at 9% interest.
If you do a cash-out refinance to a $400,000 mortgage at 6% interest, amortized over 25 years, your monthly payments will increase roughly $640 per month.
If you borrow $100,000 with a personal loan at 9% interest, amortized over five years, your monthly payments on that loan will be around $2,076 per month.
Monthly savings of the cash-out refinance: $1,436.
But it’s not without risks. If home values drop, you could end up owing more than your home is worth. And since your home is the collateral, you could lose it if you’re unable to keep up with the larger loan payments.
Be sure to factor in the upfront costs. You’ll pay for closing costs and may face a prepayment penalty on your existing mortgage. And of course, the bigger loan means you’ll pay more interest over time unless you pay it off faster. Not crunching the numbers is a major mortgage mistake.
Cash-out refinancing is most powerful when used strategically—for example, to boost your home’s value or eliminate high-interest debt. But if you use it to fund a vacation or lifestyle upgrade, it could leave you financially stretched and put your home at risk.
Refinancing to Consolidate Debt
When you use refinancing to combine debts, you replace expensive loans with cheaper ones. Credit cards might charge around 20% interest, while mortgage rates are much lower.
This also gives you one payment instead of many, making keeping track of your money simpler and often lowering the total interest you’ll pay. This even improves your debt-to-income ratio by lowering your overall monthly payments.
Here’s how to do it right:
First, list all your debts with their interest rates and monthly payments. Focus on high-rate debts like credit cards (often 10% to 25%) and personal loans (often 9% to 24%).
Let’s say you owe $20,000 on credit cards at 20% interest and $300,000 on a mortgage at 5% interest. Your current monthly credit card interest is about $331, and your mortgage payment is about $1,745.
You get a cash-out refinance for $320,000. $300,000 pays off your old mortgage, while $20,000 pays off your credit card debt.
Your monthly credit card interest is now $0, so you’re only making payments on a $320,000 mortgage. Assuming it’s at the same interest rate, your monthly mortgage payment is about $1,861.
($331 + $1,745) – ($0 + $1,861) = $215. You’re saving over $200 every month by consolidating your debt.
But remember that refinancing costs money upfront. Make sure your interest savings will exceed these costs within a reasonable time.
The biggest risk is taking cash out of your home and building new credit card debt. Avoid this trap by creating a budget that prevents new debt from building up after consolidating.
Mortgage Stress Test
This test was introduced in 2018 as a way to lower the risk of mortgage default. It’s designed to make sure that borrowers will be able to keep making their payments even if their financial situation changes.
Since 2021, this test means that you need to qualify for your desired mortgage at either a 5.25% mortgage interest rate or 2% above the rate you’re offered by your lender, whichever is higher.
If you’re just renewing your mortgage, you won’t have to re-qualify. But if you’re refinancing, you likely will.
Luckily, if you’re doing a “straight switch” (changing lenders but keeping the same loan amount and amortization), you don’t have to re-qualify as long as you have at least 20% equity.
Existing Mortgage Contract Considerations
Before refinancing, check your current mortgage for obstacles. When you refinance, you’re breaking your old loan agreement to start a new one.
Look for these key things in your existing mortgage:
Prepayment penalties might cost you if you pay off your loan early. Some lenders charge 2% to 4% of your loan balance, which can erase refinance savings.
Refinancing costs typically run between 2% and 6% of your loan amount. These include appraisal fees ($300 to $500), loan origination fees (about 1% of your loan), and title insurance.
Your credit history affects the rates you’ll qualify for. Check your credit report before applying to avoid surprises.
The loan terms matter too—how long you’ve had your current mortgage vs. how much longer you plan to stay in your home affects whether refinancing makes financial sense.
Refinancing and Borrowing Costs
Refinancing isn’t free. Understanding the costs helps you decide if it’s worth it.
- Legal fees: Typically $750–$1,250
- Appraisal fee: Typically $300 to $600
- Mortgage discharge fee: Typically $200–$350
- Mortgage registration fee: Varies by province
- Mortgage prepayment penalties: apply when refinancing before the end of your term. If you apply during the term, penalties vary based on mortgage type, mortgage size, current and previous mortgage rates, and other factors
Calculate your break-even point by dividing these costs by your monthly savings. If costs are $6,000 and you save $200 monthly, you’ll break even in 30 months (2.5 years).
Ask your lender about rolling these costs into your loan instead of paying them upfront. This will raise your loan amount but preserve your cash.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
Mortgage Refinancing Could Pay Off
Refinancing works for many homeowners. Knowing your home equity and choosing the right refinancing option can lower your payments, pay off high-interest debt, or even shorten your loan term.
Just make sure to compare the upfront costs against your potential savings. Refinancing could be the financial boost you need if you’ll stay in your home long enough to break even on those costs.
