What Is Refinancing a Mortgage? How to Do It in Canada

Your mortgage rate is 6.5%, but your neighbour just got 4.8% on their new home. Should you apply for refinancing to get a better deal, or will the costs eat up any savings?

This question keeps many Canadian homeowners up at night. With interest rates bouncing around like a pinball machine, figuring out when to refinance your mortgage can feel overwhelming.

Here's the truth: refinancing can save you thousands of dollars over time or put money in your pocket right now. But it can also cost you big if you don't understand the rules. This guide breaks down everything you need to know about mortgage refinancing in Canada, with real examples and current market insights.

By the end, you'll know exactly when refinancing makes sense and how to do it without getting burned by hidden costs.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Quick Mortgage Refinancing Tips (Save These!)

Before we dive deep, here are the key points every Canadian homeowner should know:

• The 2% Rule: Refinancing usually makes sense when you can lower your interest rate by at least 1–2%
• 80% Maximum: You can borrow up to 80% of your home's value when refinancing
• Investigate Penalties: Breaking your mortgage early can cost $5,000–$15,000+ in penalties
• Best Timing: Refinance near the end of your term to avoid hefty penalty fees
• Shop Around: Different lenders offer different rates—compare at least three options
• Break-Even Point: Calculate how long it takes for savings to cover refinancing costs
• Credit Matters: You need good credit (usually 650+) to get the best refinancing rates

What Is Refinancing a Mortgage? (The Simple Answer)

Refinancing your mortgage means breaking your current mortgage contract and replacing it with a brand new one. Think of it like trading in your car for a different model.

Here's how it works: you get a new mortgage (either from your current lender or a different one) to pay off your existing mortgage completely. The new mortgage comes with new terms, a new interest rate, and a new payment amount.

This is different from renewing your mortgage. When you renew, you're staying with the same lender and keeping the same basic mortgage, just having the interest rate adjusted for the current market and signing on for another term. Refinancing means starting fresh with a completely new mortgage contract.

Mortgage Renewal vs. Mortgage Refinancing

Here's an example of renewal vs. refinance in action:

Let's say you get a mortgage loan from Lender A. It has a $300,000 principal balance with a 5.5% interest rate, 5-year term, and 25-year amortization.

Five years later, your remaining principal balance is $267,551.55, and it's renewal time. Lender A sends you a renewal notice for a $267,551.55 principal balance with a 5.75% interest rate (their current rate), 5-year term, and 20-year amortization. This is a straightforward renewal. You don't have to requalify for your loan.

At renewal, you don't have to take your lender's first offer. You can negotiate things like prepayment privileges, payment frequency, renewal intervals, and interest rate. You can even change the type of loan, like going from an adjustable-rate mortgage to a fixed-rate mortgage. You just can't borrow additional money or extend the amortization.

But maybe Lender B is offering you a 5.25% rate if you renew with them. You ask Lender A to rate-match, but they don't, so you switch lenders. Lender B writes you a loan with a $267,551.55 principal balance, a 5.25% interest rate, a 5-year term, and a 20-year amortization. Since it keeps the amortization period and loan amount, it's treated as a renewal, even though it's technically a new loan. You'll have to requalify with Lender B.

Or, you could refinance. Maybe you want to do renovations or consolidate high-interest debt. You could do this with Lender A or Lender B. For this example, we'll go with Lender B.

If you need an extra $100,000, you'd apply for a $367,551.55 loan amount (plus closing costs) and go through the qualification process again. The interest rates and other contract terms are negotiable, just like when you first got your mortgage.

Since you're doing this at renewal time, you probably don't have to worry about prepayment penalties. More on those later.

Lender B uses the loan money to pay off your $267,551.55 loan with Lender A, leaving you with $100,000 in your pocket and $367,551.55 (plus costs) in mortgage debt. Your new loan with Lender B has a 25-year amortization, not a 20-year one, because you're not continuing your old loan.

Mortgage Stress Test

If you switch lenders or refinance instead of renew, you’ll probably need to re-qualify. And that means going through the mortgage stress test again.

This test was introduced in 2018 as a way to lower the risk of mortgage default. It’s designed to make sure that borrowers will be able to keep making their payments even if their financial situation changes.

Since 2021, this test means that you need to qualify for your desired mortgage at either a 5.25% mortgage interest rate or 2% above the rate you’re offered by your lender, whichever is higher.

Why Would You Refinance Your Mortgage in Canada?

If you can renegotiate your mortgage contract every five years at renewal time, why would you break your mortgage and refinance?

There are three main reasons Canadians refinance their mortgages. Let's break them down:

Get a Lower Interest Rate

This is the classic reason to refinance. If rates have dropped since you got your mortgage, refinancing could save you serious money. If you reinvest that saved money into your mortgage as extra principal payments, you can pay off your mortgage faster.

Here's a real example: you have a $400,000 mortgage at 6%. Your monthly payment is about $2,559. If you refinance to 4.5%, your new payment drops to about $2,214—that's $345 less every month, or $4,140 per year!

This is a bigger deal the longer you have before renewal. A 3-year term would save you $12,420. A 5-year term would save you $20,700. An online refinancing calculator can help you estimate your savings.

However, if you refinance partway through your term instead of waiting for renewal time, the penalties for breaking your mortgage can eat into your potential savings. Carefully consider whether you should refinance or wait to renegotiate your existing mortgage.

Change Your Mortgage Terms

Sometimes your needs change. The big one that requires refinancing: extending your amortization period. By keeping the same principal balance but paying it off over more years, your monthly payment decreases.

Refinancing to change your interest rate or amortization period (or other terms of your mortgage contract) is called “rate-and-term refinancing.”

Access Your Home Equity

Your home equity is the difference between what your home is worth and what you still owe on your mortgage. As you make payments and your home's value increases, this equity grows.

Canadian regulations let you borrow up to 80% of your home's current value when refinancing. In other words, you need to keep at least 20% equity in your home—the threshold where you no longer need mortgage insurance. Here's how this works:

Example:

• Home value: $500,000
• Current mortgage balance: $150,000
• Maximum refinancing amount: $400,000 (80% of $500,000)

Refinancing would replace the current mortgage balance with a new mortgage balance. Therefore, to calculate the "cash-out" amount:

• $400,000 - $150,000 = $250,000

You could do a cash-out refinance and walk away with $250,000 in cash (minus closing costs on the new loan) to do things like renovate your kitchen, pay for university, wipe out medical debt, or consolidate high-interest credit card debt.

Instead of having $150,000 left on your mortgage balance, you'll now have $400,000 remaining.

The mechanics are different, but what you're essentially doing is withdrawing $250,000 of the $350,000 equity you've built in your home, leaving $100,000 (20% of $500,000). You're reversing some of your progress in paying off your mortgage, but you have cash in hand.

This type of refinancing may be called by different names depending on what you’re using it for.

Cash-out refinancing lets you take money from your home's equity. You get a check at closing that you can use for anything from home improvements to paying off credit cards.

Consolidation refinancing combines multiple debts into one loan. Instead of juggling several payments, you make just one. (It’s basically cash-out refinancing specifically to pay off other debts, especially high-interest ones.)

How Much Money Can You Get From Refinancing?

The amount you can access depends on your home's current value and how much you still owe. Here's the math:

Maximum you can borrow = 80% of home value

Available equity = Maximum borrowing - current mortgage balance

Let's look at different scenarios:

Scenario 1 - Lots of Equity:

• Home worth $600,000
• Current equity: $400,000 (66.67%)
• Mortgage balance $200,000
• Maximum borrowing: $480,000
• Available cash: $280,000

Scenario 2 - Limited Equity:

• Home worth $400,000
• Current equity: $50,000 (12.5%)
• Mortgage balance $350,000
• Maximum borrowing: $320,000
• Available cash: None (you owe more than 80%, so the calculation result is negative)

Scenario 3 - Moderate Equity:

• Home worth $450,000
• Current equity: $170,000 (37.78%)
• Mortgage balance $280,000
• Maximum borrowing: $360,000
• Available cash: $80,000

Remember, lenders will also check your income, credit score, and debts to make sure you can handle the new mortgage payments.

How to Refinance Your Mortgage in Canada (7 Steps)

Ready to refinance? Here's exactly what to do:

Step 1: Figure Out Your "Why"

Don't refinance just because rates dropped a little. Calculate whether it saves you money after all costs.

Use this simple break-even formula:

Total refinancing costs ÷ Monthly savings = Break-even time in months

If it takes longer to break even than you have remaining in your mortgage term, refinancing isn't worth it. And depending on how close your break-even point is to renewal, when you can renegotiate your rate, the hassle might not be worth the savings.

Step 2: Check Your Credit Score

Most lenders require a credit score of 650 or higher for refinancing. Scores above 700 get you the best rates.

Check your credit for free through Equifax or TransUnion. If your score is low, wait a few months and work on improving it before applying.

Step 3: Shop Around for Rates

Don't just stick with your current lender. Different lenders offer different rates, and mortgage brokers can access even more options. Lenders may offer lower rates than your current lender to secure you as a customer.

Get quotes from at least three sources:

• Your current lender
• Two other major banks
• A mortgage broker

Step 4: Calculate All Costs

This is where many people get surprised. Refinancing isn't free. Here are the main costs:

Prepayment Penalty: This is usually the biggest cost. If you break a fixed-rate mortgage early, you'll pay either three months' interest or the interest rate differential (IRD), whichever is higher.

Legal Fees: A lawyer needs to handle the paperwork.

Appraisal Fee: The lender needs to determine your home's current value.

Registration Fees: Since it's a new mortgage, it needs to be registered.

Discharge Fees: If you're switching lenders, you'll incur a fee.

Step 5: Apply for Your New Mortgage

Once you've found the best rate, apply for pre-approval. You'll need:

• Proof of income (pay stubs, tax returns)
• Bank statements
• Current mortgage statement
• Property tax bill
• List of assets and debts

The lender will also order a home appraisal and conduct a mortgage stress test with you.

Step 6: Review and Sign

If approved, review all terms carefully with your lawyer. Ensure the rate, payment amount, and terms align with your expectations.

Step 7: Close the Deal

Your lawyer (or notary) handles the closing. They'll use your new mortgage money to pay off the old mortgage, register the new one, and give you any leftover cash.

How Much Does It Cost to Refinance in Canada?

The total cost depends on whether you break your mortgage early or refinance when it's up for renewal.

Prepayment Penalties (The Big One)

If you have a variable-rate mortgage, your penalty is usually three months' interest. Not three monthly payments—just the interest. It's calculated like this:

Penalty = (Current mortgage balance) × (Current interest rate) × (3 ÷ 12)

On a $300,000 mortgage balance at 5%, that's about $3,750.

Fixed-rate mortgages are trickier. You pay the higher of:

• Three months' interest, or
• The interest rate differential (IRD)

What's an interest rate differential? It's the difference between your current mortgage rate and the lender’s current rate for a loan with a similar remaining term, applied to your remaining balance for the time left—essentially compensating the lender for the lost interest. It only applies to fixed-rate mortgages. The earlier you break your mortgage and the steeper the rate difference, the higher the IRD penalty.

The IRD can be massive, sometimes $10,000-plus. Thoroughly read your contract for how your lender calculates prepayment penalties before applying for a mortgage refinance. The difference between posted rates and discount rates is especially important.

You can avoid prepayment penalties by refinancing at renewal time, rather than during the loan term. Refinancing is, technically, paying off your current mortgage all at once. It's like putting a lump sum toward your outstanding balance, which most lenders allow without restriction during the renewal period.

Other Costs

Here's what else you'll pay:

Legal Fees: $700–$1,500 for a lawyer to handle the paperwork

Appraisal Fee: $300–$500 to determine your home's current value

Registration Fees: About $70 to register the new mortgage

Discharge Fees: $200–$350 if you're switching lenders

All told, you can expect non-penalty closing costs of about $1,270–$2,420 (cheaper if you're staying with the same lender). Comparing the costs with and without penalties, it's clear why timing is so important when you're refinancing.

When Lenders Cover Costs

Some lenders offer "free refinancing" promotions where they cover your legal fees and other costs. This usually requires:

• Switching to their bank
• Minimum mortgage amount ($200,000+)
• Good credit score

Should You Refinance Your Mortgage?

Whether refinancing makes sense depends on your situation and current market conditions.

When Refinancing Makes Sense

Rate Drop of 1–2% or More: If you can lower your rate significantly, the savings often outweigh the costs.

High-Interest Debt: Using a 6% interest refinance to pay off credit card balances on cards charging 19%+ interest can save thousands per year. Just have a plan to make sure you don’t cash out and then build up more credit card debt!

Major Expenses: Do you need money for home renovations, education, or investments? Home equity is often the cheapest way to borrow large amounts. Mortgages have low rates compared to other options.

When to Wait

Small Rate Difference: Don't refinance to save 0.5%. The costs won't be worth it.

High Penalty Costs: If breaking your mortgage early costs $10,000+ in penalties, consider waiting until renewal.

Short Time Left: If you're within 12–18 months of renewal, just wait it out.

Limited Equity: If you have less than 20% equity, you won't be able to get cash from refinancing.

Poor Credit: Make sure you qualify to actually receive the favourable rates you want to refinance for.

Current Market Reality (2025)

Interest rates have been volatile. The Bank of Canada has been adjusting rates to fight inflation. Some lenders have been adjusting rates to account for economic risk. There's a lot more uncertainty than usual.

If you have a variable-rate mortgage and rates have climbed since you got it, switching to a fixed rate through refinancing might make sense, even if the rate isn't much lower. You get payment certainty.

If you locked in a low fixed rate a few years ago, think twice before breaking it. Those penalty costs could be brutal.

Alternatives to Full Refinancing

Sometimes refinancing isn't your best option. Here are alternatives:

Home Equity Line of Credit (HELOC)

A HELOC lets you borrow against your equity without breaking your mortgage. You only pay interest on what you use.

Home equity loans do the same thing, except you get a lump sum instead of a line of credit.

Pros: No prepayment penalties, flexible borrowing 

Cons: Higher interest rates than refinancing

Blend and Extend

Some lenders let you blend your current rate with today's rates and extend your term. This avoids prepayment penalties.

Example: You have 2 years left at 6%, the new rate is 4%. Your blended rate might be 5% for a new 5-year term.

Second Mortgage

Obtain a separate mortgage to access the equity you want to utilize. You'll have two mortgage payments, but avoid breaking your first mortgage.

Pros: No penalties on your first mortgage

Cons: Higher rates, two payments to manage

5 Refinancing Mistakes That Cost You Money

Don't make these expensive errors:

1. Not Calculating the True Break-Even Point: Include ALL costs, not just the penalty. Many people forget about legal fees and other expenses.
2. Focusing Only on the Rate: A slightly lower rate doesn't help if penalty costs are huge. Look at total costs vs. total savings.
3. Refinancing for Lifestyle Purchases: Don't tap your home equity for vacations or luxury items. Use it for investments or paying off high-interest debt.
4. Not Shopping Around: Rate differences between lenders can be 0.5% or more, and you might secure promotional rates from competitors or rate-matching from your current lender.
5. Bad Timing: Refinancing right after signing your mortgage or with just months left on your term rarely makes financial sense.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Ready to Refinance Your Mortgage?

Refinancing can be a smart financial move—or an expensive mistake. The key is running the numbers honestly and understanding all the costs involved.

Here's your action plan:

If You're Considering Refinancing:

1. Calculate your break-even point, including ALL costs
2. Check your credit score and improve it if needed
3. Shop around with multiple lenders and brokers
4. Consider alternatives like HELOCs or blend-and-extend
5. Time it right, ideally near the end of your current term

Red Flags to Avoid:

• Breaking your mortgage with years left on the term
• Refinancing for non-essential purchases
• Not comparing total costs vs. total savings over time
• Rushing into the first offer you receive

Remember, refinancing is a tool, not a goal. Use it to improve your financial situation, not just because rates dropped a bit. When done right, it can save you tens of thousands of dollars or give you access to cash when you need it most.

The mortgage market is constantly changing, so what makes sense today might not be the case next year. Stay informed, crunch the numbers, and don't hesitate to ask professionals for help when the math becomes complicated.