How Does Refinancing Work in Canada?


If you want to get a new mortgage to replace your old one, this process is called “refinancing” of a mortgage. This allows for the initial mortgage loan to be paid off and the borrower to take advantage of more favorable interest rates with a new mortgage loan. Many who choose to refinance do this to save money, as it can be quite difficult to make monthly mortgage payments in a market that fluctuates so drastically in such short periods of time. In this article, we’ll discuss:

  1. Why people refinance their mortgages.
  2. The methods with which people may refinance their mortgages.
  3. The costs of mortgage refinance.

Why Do People Refinance Their Mortgages?

The most common reason that lenders see when people refinance their mortgages is to take advantage of lower interest rates. This is especially true of fixed-rate mortgages when interest rates on the market have plummeted. While this may be the most common scenario, it is certainly not the only one.

Accessing the Equity of Their Home

If you have been in your home for a while and have paid a significant portion of your mortgage loan off, you can choose to access the equity of your home. This essentially allows homeowners to borrow against the value of their home using a fixed-rate loan or a home equity line of credit (HELOC).

Refinancing allows homeowners to access these funds easily and quickly.

Consolidation of Debt

If you’ve got enough equity in your home, you may be able to withdraw a large lump-sum amount via refinancing or private second mortgage to tackle the costs of your existing debts.

What Refinancing Methods are Available?

There are three primary methods of refinancing available to the public:

  1. Breaking one’s existing mortgage early.
  2. Taking advantage of a home equity line of credit.
  3. Blending and extending an existing mortgage.

Breaking a Mortgage Early

If you break your mortgage with your lender early, there’s a good chance that you will be made to pay a fee for doing so. However, if you are able to take on a new mortgage loan with a new lender at a lower interest rate, this could still save you a substantial sum in the long-term.

Obtaining a HELOC

Through your existing lender, you can access the equity of your home with a home equity line of credit, otherwise known as a HELOC. This is a long-term loan that must be repaid, but you get to access your equity funds as needed, rather than as a singular lump-sum payment.

Blending/Extending an Existing Mortgage

Your lender might offer you what is known as a “blended rate.” This type of rate is determined by blending your current mortgage interest rate with the additional money that you borrow at a lower rate. Blended rates are typically higher than other types of rates, however, so be careful.

What Does it Cost to Refinance a Mortgage?

You are almost guaranteed to be saddled with attorney fees as a result of refinancing, as a lawyer must be present to change the financing on the title of the mortgage.

If you are breaking your mortgage early, there is likely to be a penalty fee that must be paid. This fee depends on the lender and the remaining balance that you have on your mortgage.