Mortgage refinancing: when to consider it and what to compare

What refinancing means

To refinance is to replace your mortgage loan with a new one, often for a different amount or different terms. You repay the current loan with the proceeds of the new one, and the property remains the security. In Quebec, the new hypothec is generally recorded in a notarial deed, which brings fees and delays.

Refinancing should be distinguished from two neighbouring operations. A renewal happens at the end of the term, with the same lender or another, without necessarily changing the amount borrowed. A transfer moves the loan to another lender, often at maturity. Refinancing, on the other hand, is most often a new credit decision: the lender reassesses your income, the value of the property and your ability to repay.

This article explains what refinancing is, common reasons for it, its costs, the relevant timing and alternatives. It contains no rates and no amounts. An authorized person, registered with the Autorité des marchés financiers (AMF), can apply these rules to your file.

Common reasons to refinance

People rarely refinance on a whim: there is almost always a project behind it. The most common reasons are:

• financing renovations;
• consolidating debts into one;
• helping a relative, for example with a down payment;
• switching lenders or product types;
• changing the repayment period to adjust the monthly budget;
• funding a life project, such as studies or a career change.

Each of these reasons has its own consequences. Consolidating debts can ease monthly payments, but it often stretches repayment over a longer period, with a total cost to examine. Financing renovations increases the debt on the property, but may also raise its value, with no guarantee.

Before you start, state your goal clearly in one sentence and ask whether refinancing is the simplest way to reach it. Sometimes it is; sometimes another solution costs less. An authorized person can help you compare without steering the answer.

Costs to know

Refinancing is never free. Here are the main cost items to examine, which vary with your contract and the lender:

• the early repayment penalty, if you repay before the end of the term;
• notary fees, for the deed and the registration of the new hypothec;
• property appraisal fees, which the lender may require;
• discharge fees for the previous hypothec;
• possible administration or file fees;
• the effect on the total cost of the loan if the repayment period is lengthened.

The penalty is often the largest item. How it is calculated varies with the type of loan and the lender: it is described in your contract, and you need to read it carefully. A fixed-rate loan and a variable-rate loan are not treated the same way.

Ask for all these costs in writing, from each lender, before deciding. A written estimate lets you compare the real cost of a refinancing rather than rely on a single figure seen in an advertisement. If a cost is unclear, ask for an explanation.

Timing: at renewal or mid-term

At renewal, the penalty is often nil: that is the least costly moment to refinance, because the contract is reaching its end and nothing holds you back. That is why it is worth noting the maturity date long in advance and starting to think several months ahead.

Mid-term, the calculation needs care. The penalty can be significant, and it adds to the other fees. Some people still come out ahead, for example if their need is pressing, but this should be established by a full calculation rather than by intuition.

A few markers for deciding on timing:

• the maturity date of your term, found in your contract;
• the estimated penalty if you leave before, requested from the lender in writing;
• the real urgency of your need, and whether it can wait;
• the prepayment privileges in your contract, which sometimes allow part of the principal to be repaid without a penalty.

If your project can wait for renewal, that is generally the simplest route. If it cannot, an authorized person can put the scenarios side by side with figures.

Compare with alternatives

Refinancing is not the only way to meet a need for cash or a change. Other solutions can reach the same goal with fewer fees, depending on your situation:

• a home equity line of credit, which gives access to an amount as you need it without replacing the existing loan;
• a personal loan, shorter and not secured by the property, with its own conditions;
• a simple change to the frequency or amount of payments, when the loan allows it;
• additional payment privileges, if what you want is to repay faster;
• waiting for renewal to act without a penalty.

Each solution has advantages and limits. A line of credit is flexible, but its nature and cost differ from those of a term loan. A personal loan avoids touching the mortgage, but its conditions are different. None is superior in itself: everything depends on what you want to accomplish, the time frame and your tolerance for uncertainty.

Ask the authorized person to present the options side by side, with the same assumptions, so the comparison stays readable.

What the lender checks

A refinancing is a new credit application. The lender generally reassesses the whole file, not only the amount requested.

It examines your income and its stability, your debts and monthly obligations, your credit history and the value of the property. The valuation may go through an appraiser, and the value used sets what can be borrowed against the property. Rules limit the proportion of the value that can be borrowed, and they vary by loan type and lender.

It also checks the existing loan: the balance, the rate, the maturity date and the privileges. Depending on your situation, you may have to meet the same eligibility tests as for a new application.

To prepare, gather the usual documents: proof of income, notices of assessment, the mortgage statement, municipal and school tax bills, and a list of your debts. The more complete the file, the faster the answer.

If your situation has changed since the last loan (new job, separation, new debts), say so from the start.

A hypothetical scenario

Imagine a couple we will call Alex and Noémie. They are thinking of redoing their kitchen and repaying a credit card debt. Their mortgage maturity is still far off, and their first idea is to refinance right away.

Before acting, they read their contract and ask the lender in writing for a penalty estimate. They then meet an authorized person who presents three scenarios side by side: refinance now, use a home equity line of credit, or wait for renewal while making additional payments in the meantime.

For each scenario they compare fees, the repayment period, the effect on their monthly budget and future flexibility. They realize their renovation can wait a few months and that renewal offers a penalty-free window.

This scenario is fictional and guarantees no result. In another case, refinancing immediately could be justified. What matters is the approach: name the goal, put numbers on the costs, compare solutions, then decide.

Mistakes to avoid

A few mistakes come up often around refinancing.

• Looking only at the rate or the monthly payment, without adding up fees, the penalty and the effect on the period.
• Refinancing mid-term without having asked for the exact penalty calculation.
• Forgetting that consolidating debts into the mortgage lengthens repayment and sometimes raises the total cost.
• Using the value of the property to fund everyday expenses, which can weaken the budget over the long run.
• Not comparing with alternatives (line of credit, personal loan, waiting for renewal).
• Signing without reading the conditions of the new loan, especially the future penalty and portability.
• Waiting until the last week before a maturity date, which cuts the time to compare.

None of these mistakes is inevitable. A conversation with an authorized person, registered with the AMF, helps you spot them before signing, when it is still easy to change course.

What an authorized person can do

An authorized person registered with the AMF can put your scenarios side by side using the same assumptions: refinance now, wait for renewal, use a line of credit, or change nothing. They can request written estimates from several lenders, explain how each calculates its penalty, and show what each option does to the total cost and to your flexibility.

They cannot tell you what you will save, because that depends on terms that change and on choices you have not yet made. What they can do is make the comparison honest and complete, so that you decide with the same information in front of you for every option.

CompareTaux plays no part in that analysis: it shows no rates, makes no recommendation and makes no automatic decision. It routes your request to an authorized person, and you can check that person’s registration in the AMF register before the first conversation.

Questions to ask and checklist

Before deciding, prepare your questions and check each point.

Questions to ask:

• what is the penalty if I leave now, and how is it calculated?
• what fees are added (notary, appraisal, discharge, file)?
• what will the new repayment period be, and what does it mean for the total paid?
• do the prepayment privileges change?
• can I port the loan if I move?
• is there a less costly solution for my need?
• can you give me these answers in writing?

Checklist:

• goal stated in one sentence;
• maturity date found in the contract;
• written penalty estimate;
• written estimate of fixed fees from each lender;
• at least one alternative compared;
• the person’s registration checked in the AMF register.

Tick each item before signing. The time spent on this step is generally far less than the time needed to fix a mistake.

Frequently asked questions

Sources

• Financial Consumer Agency of Canada
• Canada Mortgage and Housing Corporation (CMHC)
• Autorité des marchés financiers: public information
• Chambre des notaires du Québec