How to Refinance Your Mortgage in Canada

Are you looking to refinance your mortgage in 2023? You have come to the right article. We’ll explain what a mortgage refinance is, when to do a mortgage refinance, good reasons to refinance your mortgage and the steps involved in it. There may be fees for refinancing your mortgage, so we’ll discuss that as well.

Refinance a mortgage: what does it mean?

A mortgage refinance is when you take your existing mortgage and you replace it with a brand new mortgage. It involves breaking your existing mortgage, paying it out in full with a completely new mortgage. The new mortgage usually differs in some beneficial way. For example, it could be for a bigger amount, a different mortgage rate, a different term length, a different amortization period, or be a different mortgage type.

On the topic of increasing the mortgage amount, you don’t have to have necessarily pay down a large sum of your existing mortgage to significantly more money in a new mortgage. It depends on your property’s value at the time of the mortgage refinance. You can unlock additional equity from your home simply from your property appreciating in value since you first bought it. Assuming you have enough income to qualify, you’re able to unlock up to 80 per cent of your property’s value through a mortgage refinance.

Mortgage refinance sample numbers

For example, if your home is worth $1 million and appraises for that value, if you have a sufficient household income, you could replace your existing mortgage of $600,000 with a new mortgage of up to $800,000. Most lenders do want a basic understanding of what you will do with the money. Not all of the money has to go toward the house. You can top up your registered retirement savings plan (RRSPs) or do home renovations, or both! You deposit any leftover money from a refinance in your bank account as as a lump sum.

Although there are other funding sources, including an unsecured line of credit or personal loan, a mortgage refinance is perhaps the cheapest source. Your family home backs the loan. It is a real asset and that leads to a lower borrowing cost. As such, the lender could sell your home to recover the funds owed if you don’t make the agreed upon payments.

When do you need to refinance your mortgage

You’ll need a mortgage refinance when you would like to make a major change your existing mortgage. That’s because a mortgage is a contract. When you sign up for a mortgage, you’re agreeing to a specific period of time to repay. If you want to break your existing mortgage for a new mortgage, you’ll need to pay off your existing mortgage. This is part of the mortgage refinance process.

By the way, you can refinace a mortgage even when it is not renewal time. You can refinance your mortgage in the middle of the term, presuming your mortgage allows for it. Most types of mortgages allow this. However, if you have However, there is something called a limited feature mortgage. These only let you refinance with your existing lender or in extreme cases may prevent you for refinancing at all.

Good reasons to refinance your mortgage

There are many reasons you might consider refinancing your mortgage. There is no judgement here. You might consider some of the following.

Consolidate debt

Perhaps the most common reason for refinancing a mortgage is to consolidate debt. Maybe you accumulated a lot of high interest debt during COVID-19 to put food on the table because you lost your job. If you’re looking to pay off that debt sooner and save on interest, consolidating that debt through a mortgage refinance can be a smart thing to do.

When you consolidate your debt, you’re rolling it into a new mortgage. The new mortgage pays off your existing mortgage and any debts you choose to consolidate or combine with your new mortgage. Consolidating debt makes sense for any consumer debt with a higher interest rate than your mortgage.

Why roll your debt into your mortgage refinance? Well, mortgage debt is among the cheapest debt out there because mortgage interest rates are much lower than for other loans. Credit cards are a popular item to roll into your mortgage. With credit card interest rates being at least 19.99% in most cases, rolling it into your mortgage is pretty much a no brainer.

However, if you do roll consumer debt into your mortgage, make sure you make a plan to pay it off. Also, be aware of your own behaviour. Taking on new consumer debt without a plan to pay it off means that you might have to refinance your mortgage to consolidate debt in a year or two. That isn’t a good financial strategy. If you roll debt into your mortgage, you want to take advantage of the interest relief and try to pay it down even sooner. The lower interest rate means that you could be paying the same as you were before, with a lot more of your money going towards principal and a lot less to interest.

Refinance a mortgage to lower your mortgage payment

Inflation has made it more expensive than before to buy the basics like gas and groceries. If you’re finding it tougher to meet your mortgage payments, you might consider refinancing your mortgage to lower you payment. You can do that by lengthening your amortization period.

The amortization period is the length of time it takes you to pay off your mortgage if you just make the minimum required payments. If you put down less than 20 per cent, your maximum amortization is 25 years. If you put down 20 per cent or more, your maximum amortization is 30 years.

Your amortization period may have started at 25 or 30 years, however, as you pay down your mortgage, your amortization period gets shorter and shorter, as your mortgage balance goes down. If you’re five or 10 years into your mortgage, there’s nothing stopping you from extending the amortization. By doing this, you’ll lower your mortgage payment.

Know this: just because you extend the amortization period, it doesn’t mean you need to pay it off in that time period. You could make extra payments to reduce the amortization period. You can stop making extra payments when you want.

If you’re trying to qualify for a mortgage on a new property, extending the amortization period can be beneficial. First, a lower regular mortgage payment can help you pass the mortgage stress test. You need to pass the mortgage stress test to have your mortgage application approved.

Refinance your mortgage for home renovations

Have you been putting off home renovations and you can’t put them off any longer? If you need to or would like to do home renovations, but don’t have the savings to pay for them, pulling equity out of your home can be a great source. Mortgage financing is a lot cheaper than the alternative, an unsecured line of credit. Not to mention, at a lower interest rate, the minimum payment from a mortgage will almost always be lower than an unsecured line of credit.

Refinance your mortgage to save on interest

If your mortgage rate is higher than the current posted rate, you might consider refinancing it. Before doing this you want to do a cost-benefit analysis. How long will it take you to break even after paying the mortgage penalty? If it’s a reasonable period of time, that’s when you might consider doing it.

If you break your current mortgage you might have to pay a penalty. Do not pay it out of your own pocket. When you refinance your mortgage, you could add the penalty on top of your mortgage balance, so you do not need to come up with a large sum all at once.

Other reasons to refinance a mortgage

The reasons you could refinance your mortgage are endless. You could refinance it because you want to gift your adult children a down payment towards a property. Or you could refinance it because you want to give them money towards their education.

Maybe you want to start a new business. Getting a business loan can be tough. Whereas, it’s usually a lot easier if you have the equity sitting untapped in your property. Not to mention the interest rate is likely a lot lower.

Before borrowing equity from you property, you want to ask yourself if it’s going to increase your net worth. If the answer is yes, then it’s probably a good idea. If the answer is no, then you’ll want to think twice before borrowing the funds.

What are the steps involved in refinancing your mortgage?

You have decided that refinance your mortgage is right for you and you’re ready to get started. Where do you begin? Here are the steps involved in the process.

Step 1: run the numbers

Before doing anything, you’ll want to run the numbers to make sure that refinancing your mortgage makes sense. It makes sense for many, but not everyone. You’ll want to look at alternatives, such as unsecured lines of credit and see which one makes the most sense for you.

Step 2: submit your mortgage application

When you decide that refinancing your mortgage is a good financial move, that’s when you’ll want to compare lenders before submitting your mortgage application. You can use an online mortgage comparison tool. You can filter for interest rates and other criteria.

Once you know the lender you want to work with, you’ll want to go ahead and submit your mortgage application. The mortgage professional or lender can assist you with that. You’ll complete an application form providing basic information, such as your name, date of birth, address, as well as a list of assets, employment details and details about the property you want to refinance. The details can include square footage and heating type, etc. The lender will also ask for permission to do a hard credit check, as it will be needed in order to get the mortgage approval.

The lender will also ask for documents to verify your income and any properties that you own. As a salaried employee, you need a recent letter of employment, pay slips and T4 slips. If you’re self-employed, you’ll want to provide the last two years of tax returns and notices of assessment. If you’re incorporated, you’ll additionally want to provide articles of incorporation and financial statements for the last two years. For any properties that you already own, you’ll want to provide recent mortgage statements, property tax bills, and rental agreements if applicable.

Step 3: initial mortgage approval

After two or three business days, you should be notified if you are initially approved or not. Being initially approved is as it sounds. It means that the lender has approved your application based on the details you provided. However, the lender usually still needs to verify important information, such as by calling your employer to confirm you actually work there and how much you make and also reviewing the documents you provided to make sure everything you entered in the mortgage application is accurate and correct. The lender also needs to confirm it will lend on your property, a topic that we’ll cover next.

Step 4: the property appraisal

A lender will want to confirm that the property being refinanced is in good condition and is marketable. It does that by conducting a property appraisal. Your lender or mortgage professional will arrange it for you. However, the lender will usually expect you to pay for it upfront, although it may offer you cashback to cover it later on, as long as you move forward with the mortgage.

Different types of appraisals

First is a remote appraisal is when the lender is able to confirm your property without visiting it in person. It does that through what is called an auto valuation model (or AVM for short). An AVM looks at comparable properties in the area to confirm the value of your property. It’s crucial that you provide accurate details right down to the square footage of your home; otherwise, it might not pass the AVM. If it passes, no other appraisal will be required. However, if it doesn’t that’s when a full appraisal will be needed.

A full appraisal is as it sounds. It’s the traditional appraisal where the appraiser visits your property and confirms its condition and value. The appraiser prepares an appraisal report looking at the outside and inside of your property. It compares similar properties in the areas and makes adjustments before submitting the report to the lender for approval.

During the pandemic a new version of the full appraisal was introduced called the modified full appraisal. The modified full appraisal is similar to a full appraisal, however, with one key difference. The appraiser doesn’t step inside your home. Instead the homeowner supplies photos to the appraiser to prepare the appraisal report based on that. The appraiser does still visit the outside of your home and take measurements.

And then there are hybrid options. The most common example is a drive by appraisal. A drive by appraisal involves the appraiser literally driving by your home to ensure it’s real and in good condition.

Step 5: lender complete and the legal process

Once your lender has signed off and approved all conditions, your mortgage application will be considered “lender complete.” This means you are ready to move to the next stage, the mortgage legal process. The mortgage legal process involves your lawyer, or in some place a notary, doing a title search to provide to the new lender that your title is free and clear except for the existing mortgage. They will also order a copy of the mortgage payout statement from your existing lender. This confirms that amount that must be paid out to your existing lender. It includes the outstanding mortgage balance, along with any penalties and fees.

Step 6: closing

In a couple of weeks if everything goes right, your mortgage refinance will be complete. Start to finish it takes about four weeks if everything goes smoothly. That’s two weeks for the mortgage work and two weeks for the legal work. Your existing mortgage will be paid off with your new mortgage, with any additional funds left over from the refinance deposited into your bank account.

What are the costs of refinancing your mortgage?

Before you proceed with refinancing your mortgage, it’s important to recognize that there are costs involved with doing it. Besides the penalty of breaking your mortgage early, there are appraisal costs as well as legal costs. If your property doesn’t need a full appraisal, you’re usually looking at about $100 for an AVM. This amount is usually deducted from the mortgage proceeds. If you need a full appraisal, more work is required. As such, you’re usually looking at about $300 for a full appraisal. Although the cost of the full appraisal can vary depending on the turnaround time needed, the complexity and size of your home and whether you need to include anything additional like a market rent analysis.

Mortgage refinance and legal fees

Then there are the legal fees. You’re usually looking at about $800 in legal fees; although the legal fees depend on the individual fees of the lawyer that you’re working with. Lawyers are free to set their own legal fees. As such, you should shop around and find a lawyer that you not only trust, but with competitive legal fees as well.

Refinancing a mortgage can be done through lawyers and third party legal companies such as First Canadian Title (FCT) and Fidelity National Financial (FNF). If your refinance application is pretty straightforward, you can save money by going through FCT and FNF. However, if your file is more complicated, for example if you want to make title changes, that’s when going with a lawyer makes more sense.

If you have a mortgage penalty, the good news is that you don’t have to necessarily pay it out of pocket yourself. You could simply add it to the balance of your mortgage, assuming there is enough equity. That’s what most people choose to do.

To incentivize you to work with them, some lenders will offer you cashback as a bonus for completing a refinance through them. You’ll receive this cashback at the end once the refinance is complete. If you’re also receiving a competitive interest rate, the cashback can be a nice added bonus and help save you some serious change.

Sometimes when doing the refinance, you’ll discover liens or charges on your property that you weren’t aware of. For example, you could find out that the company that you rented your hot water heater from put a lien on your property without you knowing it. That will need to be cleared up before the refinance can take place. The lien will need to be removed, which usually involves paying it off.

Mortgage vs. HELOC

When refinancing your mortgage you have two options: you could take out a new mortgage or you could take out a Home Equity Line of Credit (HELOC). A new mortgage makes the most sense when interest savings is your main reason for refinancing and you plan to use the extra funds right away. For example, if you plan to do a renovation with the full amount right away or buy a rental property, that’s when the mortgage option makes the most sense.

However, when you aren’t planning to use all the funds right away, that’s when a HELOC can make sense. A HELOC is similar to an unsecured line of credit. You can use the funds whenever you want. Only the balance owing accumulates interest. That makes it a lot more flexible. You can make interest-only payments, making it a lot more affordable from a cash flow standpoint as well.

Or you could do a combination of the two. You could take out a new mortgage for funds you plan to use right away and a HELOC for funds you won’t need until some point in the future. The choice is yours.