Mortgage refinancing: replacing your current mortgage on purpose

What a mortgage refinance is

A mortgage refinance is the replacement of your existing mortgage with a new mortgage secured against the same property, so that the rate, the term, the amortization or the amount borrowed can change. The existing charge is discharged and a new one is registered, which is why this is not a second loan stacked on top of the first. It is the first mortgage, rewritten.

Most people arrive at this product through one of three doors: they want a smaller payment, they want a shorter or longer remaining amortization, or they want to pull equity out of the property for another purpose. Consolidating higher-interest unsecured debt, funding renovations, covering a down payment on another property and paying for a business expense are all the same transaction with a different intention attached. If you have searched for a refinance loan, or typed the phrase loan refinance loan into a search bar, this is the product you were looking for.

Two features define it. It is secured, so the lender's claim is registered against the property and the approval test looks like a mortgage test rather than a personal loan test. And the amounts are usually larger than anything you could qualify for unsecured at the same income, because the property is standing behind the debt.

loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions. It matches borrowers with licensed lenders and shows what those lenders offer so you can compare.

Who it suits

• You already own the property and have built equity in it, and the equity is large enough to support the amount you want to borrow.
• You hold a mortgage whose term is ending, or is far enough along that pricing out an early exit is worth doing.
• You have documentable income, whether from employment, filed self-employment returns, a pension or rental property, and you can produce the paperwork.
• You want to move higher-cost unsecured balances onto one secured payment, and you accept that doing so puts your home behind those debts.
• You expect to stay in the property long enough for the savings or the freed-up cash to exceed the fees you pay to set up the new mortgage.
• Your credit file is either in good standing, or any past insolvency has aged past the point where it is reported.

What a lender checks

Four files decide the answer: income, existing payments, credit, and the security itself.

Income is verified rather than stated. Salaried borrowers are usually asked for recent pay statements, a letter of employment and a notice of assessment. Self-employed borrowers are usually asked for filed returns and notices of assessment, sometimes for two years. Rental income counts, with a portion of gross rent used rather than the full amount in most cases.

Existing payments are added up against income. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and they qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25%, under OSFI Guideline B-20. Insured mortgages and provincially regulated lenders are not all subject to that guideline, which is one reason two lenders can reach different answers on the same file.

Your credit file is pulled from one or both of Canada's two national credit reporting bureaus, Equifax Canada and TransUnion Canada. A free copy of your credit report is available from each. Past credit events have fixed reporting windows: a consumer proposal stays on your report for 3 years after completion, or 6 years from filing, whichever comes first, and a first bankruptcy stays on your report for 6 years after discharge.

The security is appraised or valued, and the lender sets a loan-to-value ceiling against that number. Property type, title, outstanding property taxes, condominium documents and overall condition all feed into it. Lending in Canada is licensed provincially, so the regulator and parts of the rulebook differ by province and territory.

What it costs to carry

A headline rate is one input into the cost of a refinance, not the cost itself. Four components decide what you actually pay.

Interest is the largest one, and it is driven by the rate, the balance and the amortization. Canadian fixed-rate mortgages are compounded semi-annually by law, so the advertised nominal rate and the effective annual cost are not the same figure. A longer amortization lowers the payment and raises the total interest paid, and payment frequency moves the number as well.

Fees are the second component: lender arrangement or administration charges, an appraisal, a title search and legal or notary work, discharge of the existing charge, registration of the new one, and in some cases a broker fee. Some of these can be added to the balance, which quietly increases the amount you pay interest on.

Insurance is the third. Where the loan-to-value ratio calls for mortgage default insurance, that premium is a real cost, usually added to the balance rather than paid up front. Title insurance and the property insurance your lender requires you to maintain sit outside the mortgage itself but are still part of carrying the home.

The fourth is the penalty for ending your current mortgage early. On a fixed-rate term, that penalty is commonly the greater of three months' interest or an interest rate differential; on a variable-rate term it is usually three months' interest. It is often the single largest cheque written during a refinance, and it is calculated by the lender you are leaving rather than the one you are moving to.

Add those components together over the amortization you actually intend to keep and you have the total cost of borrowing. That total, not the headline rate, is the number to compare between offers. The Bank of Canada publishes a policy interest rate, a prime rate, conventional mortgage rates and Government of Canada benchmark bond yields; these are benchmarks, not offers, and no lender is obliged to match them.

How it compares with the alternatives

Option	When it fits	What to watch
Refinance loan: replace the first mortgage	You need to change the rate, the term or the amount borrowed, and you want a single payment on the whole balance.	The penalty for breaking the current term, the setup fees, and the fact that lengthening the amortization restarts the interest clock.
Renewal or blend-and-extend with your current lender	Your term is close to maturity, or you need only a small additional amount.	A renewal offer is not automatically competitive. Blending can apply a current rate to the new portion while the old rate still governs the rest.
Second mortgage or home equity loan behind the first	You want to leave an existing first mortgage in place and borrow against equity behind it.	Second-position lending prices above first-position lending, and you carry two payments and two charges to unwind later.
Line of credit mortgage loan	You need revolving access to equity over time rather than one lump sum.	At federally regulated lenders a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. Rates usually move with the market, and interest-only payments can stretch a balance out for years.
Unsecured loan or unsecured line of credit	The amount needed is small, or you want to keep the home out of the arrangement.	Pricing is generally higher than secured borrowing, and the limit is tied to income and credit rather than to equity.
Selling the property instead	You need more than the equity can support, or you no longer want the asset.	Transaction costs, timing and the loss of the property as an ongoing asset.

Before you sign

1. Read the disclosure and identify the total cost of borrowing, not just the rate. Ask how the penalty for breaking the new term is calculated, and find out how the lender you are leaving calculates the penalty you owe now, before you commit to anything.
2. Confirm the mechanics of the offer: the amount advanced, the amortization, the payment frequency, whether fees are deducted from the advance or added to the balance, and whether the rate is fixed or variable.
3. Check the security terms: the value the lender used, the resulting loan-to-value ratio, whether mortgage default insurance applies, and whether the new charge is registered in first or second position.
4. Run the purpose test. If you are consolidating, compare total cost over the amortization rather than monthly payments. If you are extending the amortization to lower the payment, work out how much additional interest that creates over the full term.
5. Verify who regulates the lender and where a complaint would go. Federally regulated financial institutions' consumer complaints go to the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders. If your situation involves a consumer proposal or a bankruptcy, only a licensed insolvency trustee can administer it, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada.