Has your credit score improved since you took out your mortgage? Are you looking to lower your payments and save money? A mortgage refinance might be exactly what you need to create some space in your budget. Keep reading to learn how to refinance your mortgage.
Key Points
1. Mortgage refinancing in Canada means replacing your current mortgage with a new one, usually to lower your rate, change your terms, or access your home equity.
2. You can refinance up to 80% of your home’s appraised value. Refinances cannot be insured, so that 80% limit is firm.
3. Refinancing has costs, including prepayment penalties, legal fees, and an appraisal, so it pays to calculate your break-even point first.
4. You will need to requalify, including passing the mortgage stress test, so a decent credit score and enough equity are important.
What Does It Mean To Refinance A Mortgage?
Refinancing your mortgage loan basically means taking out a new loan with different terms to pay off the original mortgage. Basically, this means you get rid of your original mortgage by paying it off with the new loan. After that, you’ll make payments toward your new loan instead.
With a mortgage refinance you can choose to:
- Refinance a mortgage with a lower interest rate and longer term (or shorter term).
- Change your mortgage from a fixed-rate to a variable-rate mortgage, or vice versa.
- Access the equity in your home by choosing a cash-out refinance. With this option, you’ll take out a mortgage that is higher than what you owe on your current mortgage. That way you can use the difference to consolidate debt or re-invest in the property through renovations.
Mortgage Refinance vs Cash-Out Refinance
Not every refinance looks the same. It helps to know the difference between a standard refinance and a cash-out refinance before you apply.
A standard refinance (sometimes called a rate-and-term refinance) replaces your existing mortgage with a new one to change your interest rate, your term, or both, without increasing the amount you owe. It is the option to choose if your only goal is a lower rate or a different payment schedule.
A cash-out refinance replaces your mortgage with a larger one and gives you the difference as a lump sum of cash. You might use that money to consolidate debt, renovate, or invest. The trade-off is that you increase your mortgage balance, and you are still capped at 80% of your home’s value.
In short, a standard refinance changes the terms of what you already owe, while a cash-out refinance lets you borrow more against your equity.
What Do You Need To Qualify For Mortgage Refinancing?
In order to qualify for refinancing you’ll need to meet a couple of requirements. In general, lenders will look at the following criteria:
- LTV Ratio Or Equity: An LTV ratio lower than 80% (or a home with 20% equity). This is calculated by dividing the balance left on your mortgage plus any other debts secured by your property by the current value of your property.
- Your TDS Ratio: Your lender will also evaluate your income and current debt, or your debt service ratio. Lenders generally require your mortgage payments to be less than 32% of your gross income and your overall debts to be no more than 40% of your gross income.
- Credit Score: Most lenders, particularly banks, will require a credit score of at least 650. Though alternative mortgage lenders may be more flexible with their credit score requirements, it’s best to refinance with good credit. As such, it’s important to check your credit score and see if it needs improvement before applying for a mortgage refinance.
Keep in mind that because a refinance means requalifying, you will also need to pass the mortgage stress test. You must prove you can afford your payments at the qualifying rate, which is the higher of your contract rate plus 2% or 5.25%.2
Steps On How To Refinance A Mortgage
If you decide to refinance your mortgage, there are a few steps you’ll need to take to complete the process.
Documents Needed To Refinance A Mortgage
Your lender may require proof of income, proof of employment, and tax documents such as your Notice of Assessment (NOA). Lenders may also require you to provide certain documents for verification, such as a T4 slip, pay stubs, bank statements, mortgage statements, and property tax bills.
What Are The Costs To Refinance A Mortgage?
Before deciding to refinance your mortgage, make sure to factor in the fees. When you refinance, you’ll have to pay legal fees, appraisal fees, administration fees, prepayment penalties, and potentially a discharge fee if you decide to switch lenders. Moreover, if you break a mortgage contract early, there’s usually a fee for that as well. In general, when you break a mortgage early, you’ll be charged around 3 months of interest or the interest rate differential (IRD) penalty, whichever is more.
| Cost | What To Expect |
|---|---|
| Prepayment Penalty | If you end your mortgage before the end of your term, you’ll likely be subject to a prepayment penalty. The amount is either 3 months’ interest on your remaining balance or the interest rate differential (IRD), whichever is more. |
| Discharge Fee | When you switch lenders, you may be charged a discharge fee, which can cost upwards of $350. |
| Legal Fees | If you use a lawyer to help with the legalities of refinancing your mortgage, you can be charged around $1,000 for their services. |
| Appraisal Fees | To appraise the value of your home, you’ll have to spend around $100 to $300. |
Cash-Out Refinance vs HELOC
A cash-out refinance is not the only way to tap your home equity. A home equity line of credit (HELOC), which is a type of second mortgage, sits on top of your existing mortgage instead of replacing it. The right choice depends on how you want to access the money and the rate you can get.
| Feature | Cash-Out Refinance | HELOC |
|---|---|---|
| How it works | Replaces your mortgage with a new, larger one | A revolving line of credit added on top of your mortgage |
| Access to funds | One lump sum | Withdraw what you need, when you need it |
| Interest rate | Lower, standard mortgage rate | Higher, usually variable |
| Maximum borrowing | Up to 80% of your home’s value | Up to 65% of your home’s value on the HELOC portion |
| Best for | A large, one-time expense | Ongoing or flexible access to cash |
Mortgage Refinance vs Mortgage Renewal
Refinancing and renewing are easy to mix up, but they are not the same thing.
A mortgage renewal happens at the end of your term, when your existing mortgage comes due and you sign on for a new term with your current lender or a new one. You are not changing the amount you owe or breaking your contract, so there is no prepayment penalty.
A refinance, on the other hand, means breaking your current mortgage before the end of the term to change your rate, your amortization, or your balance. Because you are ending the contract early, a refinance usually comes with a prepayment penalty.
If your main goal is a lower rate and you are close to the end of your term, timing your refinance to line up with your renewal can help you avoid that penalty. Some lenders also offer a “blend and extend,” where they blend your current rate with a new, lower rate and extend your term, which sidesteps the break penalty while still lowering your rate.
What Are The Pros And Cons Of Refinancing A Mortgage?
Refinancing can free up room in your budget, but it is not the right move for everyone. Weigh the benefits against the drawbacks before you decide.
Pros Of Refinancing
- Lower monthly payments: Refinancing may extend your term but can lower your interest rate and free up monthly cash flow.
- Shorten your mortgage term: If you lower your rate enough, you may be able to pay a little more each month and still pay less overall, clearing your mortgage sooner.
- More cash in hand: Taking out a larger mortgage can free up cash for home renovations and other expenses.
- Choice of a variable or fixed rate: When you refinance, you can switch your rate to a fixed or variable rate.
- Consolidate debt: Refinancing can free up cash you can use to consolidate higher-interest debts into your lower mortgage rate.
Cons Of Refinancing
- Longer loan period: Refinancing often extends your amortization. Replacing a 30-year mortgage that has 25 years left with a new 30-year term stretches your repayment out further.
- More fees: You will incur new fees that may not be easily recovered through a lower interest rate.
- A bigger mortgage: By rolling new costs into the loan, the amount you owe can end up being larger than it needs to be.
Can You Refinance A Mortgage If You Have Bad Credit?
Mortgage refinancing can help lower your payments and save you money. But is it possible to refinance your mortgage if you have poor credit? The short answer is yes, you can. However, there are a few things you can do to help smooth the process.
Make Sure Your Application Is Attractive
It is very important to understand that refinancing your mortgage with lower-than-average credit can make it difficult to qualify. To help improve your candidacy as an applicant, be sure to include all the necessary documents like pay stubs, the prior year’s tax documents, and any other supporting information you can.
For example, if you are due for a large raise or promotion, request a letter documenting the change in your pay. Job history demonstrates security, so asking for a letter from your human resources department documenting the tenure of your employment can also improve your application.
Build The Equity In Your Property
No matter how beautiful your home is, few banks will be willing to refinance your mortgage if you owe more on it than it is worth. Banks issue loans based on the market value of your property, and without your own money invested, the investment for a third party is risky.
Different banks require different amounts of equity, so be sure to do your research. For example, more conservative banks may want you to have 25% of the home’s value invested, while more aggressive lenders may be okay with 5% to 10% home equity.
Figure Out Your Break-Even Point
Replacing a 5% interest rate with a 4% rate isn’t as simple as it sounds. There are fees and other costs associated with a mortgage, such as closing costs. This can make it difficult to calculate the savings in interest versus the cost of refinancing. As a rule of thumb, refinance only if you can save yourself at least half a percent on your current interest rate, although more is better.
Know The 80% Refinance Limit
In Canada, you cannot insure a refinance through the Canada Mortgage and Housing Corporation (CMHC). Since 2016, refinances have not been eligible for mortgage default insurance, which means you can borrow up to a maximum of 80% of your home’s appraised value when you refinance.1 If you have limited equity or weaker credit, that 80% ceiling is the main thing to plan around. The CMHC still offers free educational resources that can help you understand what you can afford and whether refinancing is right for you.
Know What To Expect
When refinancing your mortgage, it’s important that you have realistic expectations, especially if your credit is less than great. If you have bad credit and want to refinance your mortgage with the bank holding your original mortgage, you may not be offered the lowest rate on the market. For consumers struggling with their credit, working with a mortgage broker who can match you with a great B-lender is probably your best option.
Should You Refinance Your Mortgage?
Overall, do not refinance your mortgage if your home has decreased in value. The refinanced loan will be granted on your property’s current value, so the refinanced loan may hold less value than the initial mortgage loan. Refinance your mortgage when:
- You’ve built up some equity in your property
- You have a good payment record
- You want to reduce your monthly payments
- You want to change from an adjustable rate to a fixed rate
Bottom Line
Refinancing your mortgage can alleviate some of the pressure you may feel from your current mortgage. It can lower your interest rate and payment amount to a certain degree. Depending on your income, you may even be able to pay off your mortgage earlier. However, do remember, refinancing can be tricky, and you should keep our tips in mind when considering it. If you are certain refinancing your mortgage is right for you, Loans Canada can help connect you with a third-party mortgage specialist.
Refinancing A Mortgage FAQs
In general, the process of mortgage refinancing can take between 2 to 4 weeks. However, it can take longer if your lender requires additional information or if your property valuation takes longer than expected.
Generally, it’s best to refinance when you’ve reached the end of your mortgage term so that you can avoid any prepayment penalty fees. However, the best time to refinance your mortgage will vary depending on your financial needs and circumstances.
Most lenders let you refinance up to 80% of your home’s appraised value, minus what you still owe. For example, if your home is worth $500,000, then 80% is $400,000. Subtract a $300,000 mortgage balance and you could access up to $100,000 in equity.
Yes. You may not get the lowest rate on the market, but it is still possible. Building more equity, gathering strong income documents, and working with a mortgage broker who can match you with a B-lender all improve your chances.
References
- Office of the Superintendent of Financial Institutions. (2026). Residential mortgage underwriting practices and procedures (Guideline B-20). https://www.osfi-bsif.gc.ca/
- Canada Mortgage and Housing Corporation. (2026). Refinancing your mortgage. https://www.cmhc-schl.gc.ca/
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
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