Refinance a Mortgage in Canada: Top Tips and Advice in 2020

With interest rates at all-time low levels and with lots of value built up in homes across Canada, now could be the ideal time to unlock your equity with a mortgage refinance. 

Are you looking for the BEST refinance mortgage rates and information to:

  • Lower Your Rate?
  • Consolidate Debt?
  • Remodel or renovate your home?
  • Invest?
  • Any combination of the above?

We are laser-focused on approving mortgage refinances for these reasons or any other reason in a simple, no-nonsense way, at the absolute best rate.

As a leading Canadian Mortgage Broker having worked with over 1,000 mortgage refinance transactions, I take all the best information I have learned over the past 12 years and distilled it into the article below. Or feel free to connect with us at any time for some free personalized advice.

For your best refinance result, let’s take a look at:

  • What is a mortgage refinance?
  • How does a mortgage refinance work?
  • Pros and cons of refinancing – is it worth it?
  • Step – by – step how to complete a mortgage refinance from start to finish.
  • Top tips and advice for your best refinance result
  • Refinance Vs Home Equity Line of Credit (HELOC)
  • Refinance if you have low credit.
mortgage refinance canada

What is a mortgage refinance?

A mortgage refinance involves paying out your existing mortgage with a new mortgage. This new mortgage can be from your existing lender, or a different lender.

A refinance mortgage can also be thought of as ‘restarting your mortgage’. Because you are restarting the mortgage, you get to pick:

  • What lender you want to work with (some lenders will offer better rates and terms)
  • Rate (fixed or variable)
  • Payment (Do you want to lower your payment or increase it?)
  • Mortgage Amount (depending on your goals you could decide on less, more or the same amount of mortgage balance)

The refinance or ‘restarting’ can happen any time during a mortgage term, on the renewal/ maturity date or even after a mortgage has been completely paid off. Simply put, it is a new mortgage on your home. 

How a Mortgage Refinance Works 

1. Determine approximately how much your home is worth.

2. What is 80% of the approximate value of your home? 

This number is 80% approximately how much we have to work with on your refinance, because 80% is usually the maximum mortgage amount on a home.

3. How much balance is left owing on your existing mortgage?

4. Subtract how much is owing on your existing mortgage from the 80% value of your home (the first thing we need to do is pay out your existing mortgage).

5. The result is how much additional home equity you will have leftover to work with.

6. You can use this additional home equity to pay out debts, renovate, invest or whatever else you’d like to do.

Mortgage Refinance Example

  1. Let’s assume your home is worth $500,000.
  2.  80% of the value of $500,000 is $400,000 – so this is the maximum amount of mortgage we can usually put on the home. You could certainly do less.
  3. Let’s assume the current balance owing on your mortgage is $200,000.
  4. We subtract the amount of the EXISTING mortgage ($200,000) from the NEW mortgage (in this case the $400,000 maximum): $400,000 – $200,000 = $200,000.
  5. This $200,000 is the amount we have to work with after your existing mortgage, in this example, has been paid off.
  6. This $200,000 surplus can be used however you’d like:  If there is $50,000 in debt, this could be paid out and you’d still have $150,000 leftover. You could renovate your home, invest, pay for education or pretty much anything else.

The numbers used above are for example purposes only, and is very general in nature. You certainly would NOT have to refinance the maximum amount if this much new mortgage is not required.

When is it worth it to refinance your mortgage? 

Refinancing always involves some sort of a ‘cost – benefit analysis’

There often can be some sort of cost or expense associated with refinancing, including potentially a legal fee or penalty to break your existing mortgage – but the main question here is does the benefit outweigh the cost?

Determining your net benefit is our goal and the following questions can help determine if and when to refinance your mortgage.

Costs:

  • How much is the penalty, if any, to break your mortgage? 

(Top Tip: If you are faced with a breakage penalty, some lenders will waive the penalty if you remain with the same lender – however beware there could be higher rates and other costs associated with this ‘no penalty approach’)

  • What are the legal and closing costs, if any, associated with the refinance?

(Top Tip: Some lenders will waive the legal and appraisal fee on a refinance, however there is almost always a tradeoff with the rate and fine printer terms of the mortgage. If you are getting something for ‘free’, what is the trade off?)

Benefits:

  • What is your existing mortgage rate compared to the rates currently available in the market?

(Top Tip: Many homeowners will refinance just for a lower rate alone – if the market rates are substantially lower than what you are currently paying, these savings are a min benefit of a refinance. Compare your existing lender with a good mortgage broker to ensure you’re getting an excellent deal)

  • Are you paying off higher interest rate debt, and consolidating into one simple mortgage payment?

(Top Tip: If you are paying off higher interest rate debt, this is where benefits of a refinance can shoot through the roof. But given the higher mortgage amount, it is worth considering paying down the mortgage faster to save on longer term mortgage interest. More below on this )

  • Would the benefits of the refinance noticeably improve your everyday life?

(Top Tip: If clearing debt, remodeling your home, paying for family needs or investing will have a noticeable effect on your everyday life then aligning your mortgage and finances to achieve this can be a good idea )

  • How would you rate the peace of mind that a refinance would provide, on a scale of 1-10?

(Top Tip: Similar to above, but deserving of its own category, it is hard to put a value on peace of mind. If you think that the refinance will provide a peace of mind, then it can certainly be worth it even if the numbers are not perfect for the time being.)

Connect with one of our mortgage refinance experts to see how the costs (if any) and benefits add up for your unique situation.

Step-by- step guide on how to refinance a mortgage (steps to completing a refinance)

  1. Information gathering: Have a good idea about (1) the approximate value of your home, (2) your existing mortgage amount, (3) credit score (do you think your credit Good, OK, needs work?) and (4) annual income/ salary.
  2. Start a Conversation: Connect with us at Altrua, or another Broker or lender of choice and start a conversation about refinancing a mortgage
  3. Mortgage Application: You will likely be asked about the information that you gathered in step 1 above, as part of a mortgage application.
  4. Fine Tuning: Your broker or bank will likely ask a few additional questions about your refinance goals and some specifics of your financial situation.
  5. Pre Approval: Your broker or bank will pre approve (a preliminary check to see if and how you’d like to proceed)  based on this information and will provide details about  the mortgage amount and rate that you are likely to end up with in a full approval.
  6. Full Approval: If the pre approval sounds good to you, the broker or bank can submit for a full mortgage approval.
  7. Answering Questions: The broker or bank obtains the full approval document and answers any questions you may have about it before signing it.
  8. Mortgage Finalizing: The mortgage approval document is signed, any documentation required is provided to the lender (employment letter, a paystub, property tax information) and an appraisal may be completed (if required by the lender).
  9. Payout of Funds: The new mortgage closes at your new rate, any debts you want paid out are automatically paid out by a legal service or lawyer, and any additional funds that you worked in to your refinance are paid out to you either by certified cheque or direct deposit from the legal service or lawyer tasked to closing your refinance.
  10. Mortgage Maintenance: Work with your Broker over time to ensure your plan is on track and that you are always up to date on opportunities to save more on your rate and cost of borrowing.

Why Refinance your Mortgage and Top Tips for Each Refinance Reason

A refinance mortgage can be used for pretty much any reason you can think of – the sky’s the limit! Here are some of the most common refinance options and advice for your best outcome:

Refinance Mortgage to Lower Your Rate

  • Don’t settle for the first rate offered by your existing lender or any one bank.
  • Use the services of a good mortgage broker, or shop between lenders yourself to get a better rate.
  • Ensure the fine print includes good flexibility to allow for real estate and other life changes that may come up in the future. 
  • This flexibility more specifically will help you get ahead faster on your new mortgage, and save you from unexpected high penalties, high costs or high rates on your renewal date, and other high expenses that can hide in the fine print.
  • Reconsider variable vs fixed rate – one or the other may save you more at this point in time and point in the economic cycle.

Refinance Mortgage to Consolidate Debt

  • Consider the difference between paying down your credit, and closing your credit.
  • If you want a certain credit card or credit line to remain open/ accessible after the refinance is complete, then request this from your Broker or lender otherwise it might be permanently closed.
  • If your overall monthly payment drops because you don’t have loan or other credit payments, consider increasing your mortgage payment to get ahead faster on your mortgage. 
  • If you increase your mortgage payment, you still gain the benefit one one, simple payment and will also save even more on interest because you are paying down your mortgage faster.
  • If set up properly using mortgage pre payment privileges, you can turn off and on these extra mortgage payments throughout the term incase of a cash flow issue or emergency during the term.

Refinance Mortgage to Renovate Your Home

  • It may sound overly obvious but often this is an issue: Ensure you obtain more than enough funds during your refinance to cover the cost of renovating or updating your home. 
  • Often costs will go over budget and if there is not enough funds to complete the project you could find yourself with an uncompleted project or going into credit card or other debt to complete the refinance.
  • If you have money left over after the renovation project is complete, it is very easy to put this money back against your mortgage in the form of a mortgage prepayment.
  • If you take out too much, it is very easy to put the money back against your mortgage, but very hard (right after a refinance) to access additional funds.
  • If you are looking to gain the most increase in your homes value from your renovation project, focus on (1) Kitchen (2) Bathrooms (3) Basement. Improvements in these areas will have the most effect on increasing your appraised value and market value.
  • If you are looking to get the most economic value from your renovations, understand that there is a diminishing rate of return on every dollar spent. For example, the first $10,000 of your project may add $20,000 to your homes value. While the next $10,000 of renovations may add $15,000 of additional home value. The next $10,000 added to your project may break even adding $10,000 of value and so on until you get to a point where the money you are spending is no longer resulting in a positive net return on the value of your home. This is just an example and will differ depending on the home and the neighborhood.

Refinance Mortgage to Invest

  • There are many Canadians who have high pensions, and low RRSP limits because of these pensions, which may be wise to invest low-interest mortgage money into a TFSA. The TFSA can be a very powerful and effective tool when funded with a low mortgage rate. This tax-free investing is potentially a big opportunity for many Canadians. 
  • The money that you use to invest in any non-registered investment (non TFSA or RRSP investment) is likely tax-deductible.
  • For example, the funds used to invest in a rental property, stock or bond, second mortgage investment or other income-producing investment are likely tax deductible. 
  • For example, if you pay $10,000 per year on interest for money used to invest with, and if you are in a 40% marginal tax bracket – then, in this case, you could write off $4,000 of interest resulting in a $6,000 after tax interest cost ($10,000 – $4,000 = $6,000). Reflected as a rate, a 2.49% interest rate, using the same 40% marginal tax bracket, becomes an after tax effective rate of 1.49% (a 2.49% rate minus 40% or 2.49% times 0.60)
  • Consider taking a higher fixed rate, since as an investor the payments will be more consistent on your mortgage, and also the slightly higher rate than variable (at the time of writing) will result in a bigger tax deduction. A lower variable rate that carries a higher risk premium will also result in higher after tax costs because there is less income tax to deduct. 

Mortgage Refinance vs Home Equity Line of Credit (HELOC)

A mortgage refinance:

  • Results in a much lower interest rate than a HELOC
  • Is much better for funds that you need now for a major project, debt consolidation or investment.
  • If desired, the mortgage can be paid back quickly using the mortgage  pre payment privilege.
  • Once the money is paid back into the mortgage, it can not be taken out again unless you refinance again.

A HELOC:

  • Offers the ability to access home equity at a later date, if the funds are not required in the short term.
  • Usually, mortgages that involve HELOCs carry higher overall interest rates – they are more expensive even on the non HELOC portion of the mortgage.
  • Good if money is borrowed for a short period (less than a year) and then paid back quickly. 
  • Money that is paid back can easily be accessible again (good for self-employed or some investors).
  • Can be used as emergency funds, but there are likely better, less costly financial planning alternatives to an emergency fund than registering the mortgage as a HELOC.

Bad credit mortgage refinance

If your credit has turned south for one reason or another, and if you are looking for a bad credit mortgage refinance then this is usually not a problem as long as you have home equity built up. 

The rate on a bad credit mortgage refinance can be a bit higher  – maybe 0.50% to 1.5% higher than the lowest rates – however this rate can be lowered in a year or two once we get your credit back up over this time.

Once the refinance consolidates debt and takes care of any other credit issues, it’s just a matter of staying on track and your credit score will improve. 

Tools and Resources for Refinancing Your Mortgage

  • Refinance checklist
  • Refinance Calculator
  • Variable vs fixed
  • Best refinance rates