How to refinance your mortgage in Canada

The ideal time to refinance your mortgage depends on the current interest rate environment in the country and your personal financial situation. Generally speaking, it may be advantageous to refinance when:

• The Bank of Canada drops its overnight interest rate. Interest rates have dropped significantly so far this year. Specially those homeowners who made purchases in the rate hike situation (2022-2023), now could be a good time to get some lower rates.
• You have built up a substantial amount of home equity (20% or more) in your home over time.
• Your credit score has improved, thanks to lower debt and less credit usage or paying your credit bills on time, making you eligible for better financing options.
• You need access to your home equity for a major expense or investment.

Analyze your personal finance situation and potential savings and costs associated with refinancing before determining if it is the right move for you.

Here are the steps involved in refinancing your mortgage:

• Evaluate your financial situation: Be clear on why you want to refinance your existing mortgage. Ask yourself what you want to achieve through this decision, such as a lower interest rate, debt consolidation or something else.
• Check your credit score and home equity: Review your credit score, and if you are serious about refinancing, take steps to improve your credit score. Check the amount of equity you’ve built in your home as this would impact your refinancing eligibility and terms. Get an appraisal on your home if required.
• Comparison shop for lenders: Shop around from multiple lenders, including your current mortgage provider, to find the best rates and terms.
• Get all your financial documents in place: Prepare financial documents like income proof, tax returns and bank statements to support your refinancing application.
• Apply for refinancing: Submit your documents and application to your chosen lender, who will then process your request and provide a new mortgage offer.
• Review the new mortgage contract: Once your application is selected and new contract sent to you, have it carefully reviewed, including checking the new interest rate, penalty, fees, repayment schedule and contract terms before signing the necessary paperwork.
• Complete the refinancing process: Work with your mortgage lender to finalize the refinancing, which may include paying off your existing mortgage and registering a new one. Enjoy the extra cash in your account when you save on interest.
  

Refinancing a mortgage in Canada typically involves several costs, such as:

• Mortgage prepayment penalty: If you’re refinancing before your current mortgage term ends, you may have to pay a prepayment penalty to your existing lender. Understand the penalty cost with your mortgage professional before you decide to go ahead with the refinance decision.
• Mortgage discharge fees: Your current lender will charge you a discharge fees to pay off your existing mortgage. If you are refinancing with your existing lender, then they may waive off this fee.
• Legal fees: You will require legal assistance, a lawyer or notary, to handle the legal aspects of the refinancing process.
• Appraisal fees: Your new lender may require a professional appraisal of your home to determine its current market value. You will have to pay the fees for the appraisal.

It is crucial to understand and factor in these costs when determining if refinancing makes sense for your financial situation.

Refinancing your mortgage can be a smart financial move that helps you save money in the long run or even access home equity. But it's not the right choice for everyone. Before taking the leap, consider these key pros and cons:

✅ Advantages of mortgage refinancing

1. 1 You can lock in a lower interest rate, potentially saving thousands of dollars over your mortgage term
2. 2 Get access to your home equity for renovations, investments, or other big expenses
3. 3 Consolidate high-interest debts into a single, lower-rate payment
4. 4 Option to switch rate terms, between fixed and variable rates, based on market conditions
5. 5 Opportunity to shorten your mortgage term if your finances allow

❌ Disadvantages of mortgage refinancing

1. 1 Substantial upfront costs for breaking your current mortgage, including legal fees, appraisals and discharge fees
2. 2 Breaking your current mortgage could trigger hefty prepayment penalties
3. 3 Extending your amortization period means paying more interest long-term
4. 4 Risk of losing home equity if you use it for non-essential purposes
5. 5 New mortgage application process requires meeting current qualification standards