Glossary
Mortgage Refinance
Replacing an existing mortgage with a new one, often to change the rate, term, or amortization, or to access home equity..
A mortgage refinance replaces your existing mortgage with a new one, usually to change the rate, term, or amortization, or to access equity built up in your home. In Canada the old mortgage is paid out and discharged from title, and the new mortgage is registered against the same property, so refinancing creates a new contract rather than amending the old one.
Refinance versus renewal and switch
A mortgage renewal keeps the same lender and the same loan, and only resets the rate and term at maturity. A mortgage switch moves the existing balance to a new lender without changing the principal. A refinance goes further: you can increase the principal, extend the amortization, consolidate other debts, or restructure the mortgage entirely — for example, pairing a collateral charge with a home equity line of credit.
Costs and penalties to expect
Breaking a mortgage before maturity normally triggers a prepayment penalty. On a closed fixed-rate mortgage, the lender charges the greater of three months' interest or the interest rate differential, which can be substantial when posted rates have fallen since you signed. Variable-rate mortgages typically use three months' interest instead. Add a discharge fee, a possible appraisal, and legal or title registration costs. A refinance break-even calculator helps weigh the penalty against the interest saved.
Qualifying for the new mortgage
Because a refinance is a new loan, you must requalify. Federally regulated lenders apply the mortgage stress test under OSFI Guideline B-20, and you generally need at least 20% equity, since refinancing above 80% loan-to-value on an owner-occupied home is not usually insurable. Pulling equity out to consolidate high-interest debt can reduce your total monthly obligations, but it converts unsecured debt into debt secured by your home, so a default puts the property at risk. Whether it is worthwhile depends on the penalty, the new rate, and how long you expect to keep the property. See the refinance guide for the step-by-step process, and confirm current rules with your lender or the FCAC.
Frequently asked questions
Is refinancing the same as renewing my mortgage?
No. A renewal keeps your existing mortgage with the same lender and simply resets the rate and term at maturity, usually with no new qualification. A refinance pays out and discharges the old mortgage and registers a new one, so you must requalify, and you can change the principal, amortization, or lender.
How much can I borrow when I refinance in Canada?
Most lenders cap a refinance at 80% of your home's appraised value for an owner-occupied property, so you generally need at least 20% equity. The maximum is also limited by your income and debt service ratios under the federal stress test. Confirm the current loan-to-value limits with your lender.
Will refinancing cost me a penalty?
Usually yes if you break a closed mortgage before its maturity date. Lenders charge the greater of three months' interest or the interest rate differential on closed fixed-rate mortgages, and roughly three months' interest on variable-rate ones. Open mortgages typically carry no penalty. Check your mortgage commitment for the exact formula that applies.
Sources
Related terms
- Mortgage Renewal — The point at which a mortgage term ends and the borrower negotiates a new term, rate, and conditions with a lender.
- Mortgage Switch — A mortgage switch moves your existing mortgage to a new lender at renewal while keeping the same balance, amortization, and payment structure.
- Interest Rate Differential (IRD) — A penalty formula some Canadian lenders use when a fixed-rate mortgage is paid off early, based on the interest the lender loses.
- Home Equity — Home equity is the portion of your home you actually own: the property's current market value minus everything still owed against it.
- Home Equity Line of Credit (HELOC) — A revolving credit line secured by your home, usually capped at 65% loan-to-value and typically priced off the lender's prime rate.