Guide to Refinancing a Mortgage in Ontario

To refinance a mortgage in Ontario, you’ll have to break your current mortgage agreement. It’s a good way to get better terms or rates, but consider the pros and cons before deciding to refinance.

How refinancing a mortgage in Ontario works

Refinancing a mortgage in Ontario is similar to refinancing in other Canadian provinces and territories. However, mortgage types, financial institution availability and fees may vary by region.

When you refinance a mortgage in Ontario, you replace your existing home loan with a new one. Ideally, your new mortgage agreement offers you more favourable interest rates, loan terms or monthly payments.

Keep in mind, however, that the maximum amount you can borrow is 80% of your home’s value at the time of refinancing. Also, because refinancing is essentially taking out a new mortgage, you’ll be subject to the same qualification requirements you went through when you applied for your original mortgage. This includes repeating the mortgage stress test, providing information about your income, calculating your debt service ratios and having your credit checked. Refinancing a mortgage likely also means paying additional expenses like appraisal and legal fees.

Additionally, it’s important to note that when refinancing a mortgage in Ontario, you don’t have to stay with the same lender who services your original mortgage. You are free to shop around to find the lender with the best rates and terms. But keep in mind that if you leave your lender, you may be charged additional costs like a discharge fee.

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Reasons to refinance a mortgage

Homeowners typically choose to refinance to get better loan terms or to take advantage of their growing home equity. By refinancing, you may be able to:

Reduce your interest rate

One of the main reasons to refinance your mortgage is to take advantage of lower interest rates. If you’re locked into a fixed rate and interest rates have dropped since you got your original mortgage, refinancing with a lower rate can lower your monthly payments and overall interest costs over the life of your mortgage.

Secure a longer amortization period

To cope with rising rates, an increasing number of borrowers in Canada are choosing to extend their amortization periods beyond the traditional 25 or 30 years. Some homeowners have amortization periods of 40 years or more. A longer amortization period will mean you’ll pay more interest overall, since you’ll be paying down your mortgage over a longer span of time, but your monthly payments will be more manageable than they would be with a shorter amortization timeline.

Turn home equity into cash

Refinancing allows you to tap into the increasing value of your home because you can borrow more than the amount you need to pay off your original mortgage. You can use this additional cash to fund big expenses like home improvements, debt consolidation, education expenses or other costs.

How much can you borrow by refinancing in Ontario?

When refinancing a mortgage, you can borrow as much as 80% of your home’s appraised value. Keep in mind that any balance remaining on your previous mortgage will be deducted from that amount. For example, say your home is appraised at $600,000 and you owe $350,000 on your existing mortgage. Here’s how much you’ll be able to borrow:

80% of the appraised value: 0.80 x $600,000 = $480,000

Mortgage balance remaining: $350,000

Maximum amount you’ll have access to after paying off your previous mortgage: $480,000 – $350,000 = $130,000

In this scenario, refinancing your mortgage could allow you to borrow up to $130,000 of your home equity to spend however you like.

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The cost of refinancing a mortgage

A mortgage refinance comes with numerous costs, which can add thousands or even tens of thousands of dollars to your bill. Before deciding to refinance, make sure you’re aware of the expenses, including:

Legal fees: You may need a lawyer to help with the paperwork.
Home appraisal fees: Because the value of your home will have changed since you first applied for a mortgage, you’ll likely be required to get an updated appraisal.
Mortgage discharge fee: If you refinance with a different lender, your original lender will charge this fee.
Mortgage registration fee: This fee depends on your province and method of registration, but is usually $70 to $80 in Ontario.
Mortgage prepayment penalty: Prepayment penalties can be the highest costs of a refinance. They are usually equal to three months’ interest on your remaining balance or the interest rate differential — whichever is higher.

How to get the best mortgage refinance rates in Ontario

The best way to ensure you’re getting the best possible mortgage refinance rates in Ontario is to shop around and get quotes from multiple lenders. You can contact your current lender, speak with a local mortgage broker or request quotes online. As Canada’s online banking landscape continues to grow, it’s increasingly easier to get quotes from dozens of lenders by filing out just one online form. Just be sure to compare details like interest rates, estimated closing costs and other fees so you know you’re comparing apples to apples, and read the fine print before signing on with any lender.

When to refinance your mortgage

The best time to refinance a mortgage depends on your individual needs, your financial goals and the mortgage market conditions. It’s generally ideal (especially if you have a closed mortgage) to wait until near the end of your current mortgage term so you won’t have to pay prepayment penalties, which can be the most costly aspect of refinancing a mortgage.

However, in some cases, refinancing may still be the best choice even if you’ll have to pay penalties and fees. For example, if refinancing allows you to secure a lower interest rate that will save you money even after you account for the penalties, it could be a good idea. Refinancing might also be a good choice if it helps you access funds to pay off higher-interest debt, such as credit card balances.

Is refinancing your mortgage a good idea?

Here are some potential benefits and drawbacks to consider when deciding whether or not to refinance:

Pros and cons of refinancing a mortgage

Pros:

Switching to a lower interest rate could save you thousands of dollars over the life of your mortgage.
Accessing a large amount of money could help you fund a large project like a home renovation.
Extending your mortgage amortization period could help you lower your monthly mortgage payments and make your loan more manageable.

Cons:

May incur a costly prepayment penalty, as well as other fees, if you refinance before your current mortgage contract ends.
Requires you to go through the mortgage process again (like the stress test and have your home appraised)
Could result in paying more interest overall if you extend your amortization period.

Alternatives to refinancing your Ontario mortgage

If you decide refinancing isn’t right for you, there are other options.

Blend and extend

A blend-and-extend mortgage, also known as a blended mortgage, is a way to get a lower mortgage rate without having to refinance and pay a prepayment penalty. Essentially, this option allows you to blend your existing mortgage’s interest rate with a lower one and thus avoid the costs associated with getting a refinanced mortgage. However, not all lenders offer blended mortgages and some may have specific requirements, so be sure to ask whether it’s an option for you.

Home equity line of credit (HELOC)

With a HELOC, you can generally access up to 65% of your home’s equity, which is less than you can borrow through a mortgage. In addition, HELOC interest rates tend to be higher than those for mortgages. However, a HELOC is much more flexible than a mortgage because it’s revolving credit rather than a lump sum, so you only pay interest on what you withdraw from your account. Plus, you won’t have to worry about paying a prepayment penalty.

Home equity loan

Sometimes called a second mortgage, a home equity loan is another way to tap into the equity you’ve built. Essentially, it’s another mortgage on top of the first one. While you’ll avoid the prepayment penalty associated with refinancing, taking out a home equity loan is generally viewed as a last resort because it will come with a higher interest rate than a refinanced mortgage or HELOC.

The main rule is that you can only access 80% of your home’s value, which will be determined by a new appraisal. Furthermore, any remaining balance you have on an existing mortgage will also be deducted from the total amount of equity you can access by refinancing. Finally, refinancing comes with a number of costs, including a prepayment penalty if you’re refinancing before the end of your current mortgage term.

Refinancing may temporarily hurt your credit for two main reasons. Closing your original mortgage account may shorten the overall average length of your credit history, which could negatively impact your score. In addition, if your lender does a hard check on your credit file, it may temporarily result in a decreased score.

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