What is mortgage refinancing?
Mortgage refinancing allows homeowners to access a part of their home equity to help fund major projects, consolidate debt, invest, or cover other financial needs.
How does it work?
Mortgage refinancing allows you to borrow money against the equity of your property. Home equity is the difference between your home’s current value and the amount remaining on your mortgage.
Good to know
You may see the terms “remortgaging” and “refinancing” used interchangeably. Both these expressions mean the same thing.
How much can I borrow?
You can refinance up to 80% of the value of your property, minus the balance of your existing mortgage.
Refinancing amount calculation example
| Element | Amount | Calculation |
|---|---|---|
| Property value | $500,000 | |
| Current mortgage balance | $250,000 | |
| Amount available through refinancing | $150,000 | ($500,000 x 80 %) - $250,000 |
| Total mortgage amount after refinancing | $400,000 | $250,000 + $150,000 |
When can you refinance your mortgage?
You may be able to refinance before your mortgage term ends, provided you meet certain criteria. If you qualify, you don’t need to wait until the end of your term. However, this choice may incur certain fees, which are outlined below.
Looking to refinance your property? Check out your options and find the one that best suits your needs.
What are the costs and risks of refinancing?
Costs
Prepayment penalty
Refinancing your mortgage before the end of your term may result in a prepayment penalty. In most cases, this is the main cost associated with refinancing.
The amount depends on your mortgage, whether you have a fixed or variable interest rate, and the time left on your mortgage term.
Property appraisal fees
You may have to obtain a new appraisal to confirm the current market value of your property.
The appraisal helps determine how much you may be able to borrow based on the equity available in your home.
Legal fees
Certain refinancing transactions may require a notary, or involve some legal work related to changing or replacing your mortgage. These costs are added to the overall cost of refinancing.
Other administrative fees
Depending on the financial institution, certain administrative or processing fees may apply.
It’s important to factor these costs into the total cost of refinancing.
Risks
Increased debt
Refinancing allows you to access funds by leveraging the equity of your home. However, the amount you borrow will be added to your mortgage balance. The more you refinance, the more you’ll have to repay.
Higher long-term interest costs
Borrowing additional funds or extending your amortization period can help reduce your monthly mortgage payments. However, it may also increase the total amount of interest paid over the life of the loan.
Your home as collateral
Since your home acts as collateral following refinancing, it’s important to borrow responsibly and ensure the financing supports your long-term financial goals.
How does refinancing affect mortgage payments?
The amount borrowed can be repaid either by combining it with your existing mortgage payments or by following a separate payment schedule.
Depending on the refinancing structure, the additional amount borrowed may have different terms than your existing mortgage, including its own interest rate, amortization period, or term.
Estimate your refinancing payments
What projects can you fund by refinancing your mortgage?
Renovations
You could refinance your home to unlock the money you need for renovations. Good news: The interest rates for mortgages are often lower than for other types of loans.
You can access funds to invest in your home without having to withdraw money from income-generating investments.
If you need access to funds for occasional needs, a home equity line of credit (HELOC) is another option that might interest you. You can dip into it when you need to and only pay interest on the funds you borrow. This may be a good solution for lengthy renovations or other projects where payments are spread over a longer period.
Good to know
There are some tax credits that can help you with renovations. There are also some grants for renovations to make your home more energy efficient.
Are you thinking about renovating your home? Read our article for help planning the whole process:
→ How to make a home renovation budget
Buying a second property
You can refinance your current mortgage to purchase a second property. Speak with your advisor to see whether this option is aligned with your goals. Your advisor will help you to answer the following questions:
- How much can you borrow?
- How much will your mortgage payments be?
- Can you afford the fees associated with buying another home as well as the ongoing costs of running two homes?
Paying off debt
It’s possible to refinance your mortgage to consolidate high-interest debts. This may help lower your interest costs or reduce your monthly payments by extending your repayment period. Your advisor can offer support with debt repayment and help you work towards better financial health.
Investing
You can also refinance your home and use the money to invest. This can be a good strategy if you want to take advantage of an investment opportunity or purchase a rental property.
Important
Be sure to weigh the cost of the additional borrowing against the potential return on your investment. Speak with an advisor or financial planner about the pros and cons to ensure you fully understand this strategy.
Contributing to an RRSP
If you’re nearing retirement and you still have contribution room available, refinancing your home to contribute to your RRSP may be a good option for you. You can use the borrowed funds to maximize your savings so that you can look forward to a more comfortable retirement while reducing your taxable income today.
Keep in mind
Because it depends on your overall financial situation, it’s a good idea to weigh your options with one of our retirement experts.
Do you have enough money put aside for retirement? Check out our article:
→ How much should you save for your retirement?
Supplementing retirement income
Refinancing allows you to unlock the equity in your home so that you can access liquidity on a recurring or occasional basis in retirement.
Keep in mind
There are other options for maximizing your income and reducing your tax burden in retirement that don’t involve refinancing your home. It’s very important to draw up a retirement plan and explore all the options available to you.
Starting a business
It can sometimes be difficult for business owners to obtain financing. That can make mortgage refinancing an attractive source of capital for those looking to start a business or invest in their company’s development.
It’s important to remember that, by refinancing your home, you’re taking on a debt that will need to be repaid. Talk to a specialized business advisor about all the financing options available to help you start your business, such as private investors.
Depending on your needs and financial situation, mortgage refinancing may be a good option for you.
For help choosing the strategy that’s best for you, speak with an advisor. We’re here to answer your questions.