Refinancing means replacing your existing mortgage with a new, usually larger one. It can be a sound financial move or an expensive habit, and the difference is entirely in the arithmetic.
How much you can access
In Canada you can generally refinance up to eighty per cent of your home's appraised value. Above that, mortgage insurance would be required, and insured mortgages cannot be used for refinancing.
On a home appraised at $850,000 with a $480,000 balance:
| Amount | |
|---|---|
| Appraised value | $850,000 |
| Maximum at 80% loan-to-value | $680,000 |
| Current mortgage balance | $480,000 |
| Equity available | $200,000 |
Note that this rests on the appraised value, not your estimate. A lender-ordered appraisal decides it.
What it costs
Refinancing mid-term means breaking your existing mortgage:
- Prepayment penalty. Variable: usually three months' interest — on the balance above, roughly $7,188 at an illustrative 5.99%. Fixed: the greater of three months' interest or the interest rate differential, which can be several times higher.
- Legal fees — commonly $700 to $1,500
- Appraisal — commonly $300 to $500
- Discharge and registration fees — a few hundred dollars
Some lenders absorb legal and appraisal costs to win the business. Ask.
The break-even calculation
Divide your total costs by your monthly saving. If refinancing costs $9,000 and saves $300 a month, you break even in thirty months. Stay in the home well beyond that and it works; sell before it and you have paid for nothing.
When the purpose is debt consolidation rather than rate reduction, compare total interest across all debts before and after — not just the mortgage payment.
Where it genuinely makes sense
Consolidating higher-interest debt
Moving credit card balances at around twenty per cent onto a mortgage in the mid-single digits is a large interest reduction. The caveat is behavioural: you have converted unsecured debt into debt secured against your home, and stretched it over decades. It works if the cards stay clear afterwards. If they refill, the position is worse than before.
Funding a renovation
Usually cheaper than a personal loan or line of credit, and may increase the property's value. Refinancing to a value that reflects the completed work is possible with some lenders.
Funding an investment property down payment
Using equity in one property to acquire another is a standard strategy. Both properties need to carry themselves under scrutiny.
Removing someone from title
After a separation, a refinance lets one party buy out the other. Some lenders treat this case with more flexibility than a standard equity take-out.
Where it usually does not
- To fund consumption. A holiday amortised over twenty-five years is an expensive holiday.
- When you are moving soon. You will not reach break-even.
- Repeatedly. Each refinance resets the clock and adds costs. If equity is being drawn every few years, the underlying issue is cash flow, not the mortgage.
Alternatives worth pricing first
- A HELOC — draw only what you need, pay interest only on that; usually a higher rate but no penalty to set up alongside an existing mortgage.
- A second mortgage — leaves a good first mortgage rate untouched; higher rate on the second portion.
- Waiting for renewal — restructure at maturity with no penalty at all. If your term ends within a year, this is often the right answer.
Figures in this article are illustrative and calculated using Canadian semi-annual compounding. Rates shown are examples, not offers. Government programme thresholds and insurance premiums are revised periodically — confirm current numbers before making a decision.
Wondering what your break-even looks like? Use the refinance calculator.
Written by Site Administrator
