adminIf you’re carrying credit card balances, a car loan, or a line of credit at 10% to 20% interest, your home equity may offer a cheaper way to borrow. Refinancing your mortgage can roll those debts into one payment at a much lower rate. It isn’t free, though, and it isn’t right for everyone.
This guide explains how it works, what it costs, and how to decide.
What Is a Mortgage Refinance?
A refinance replaces your current mortgage with a new, larger one. You use the extra money to pay off other debts or cover big expenses. In Canada, you can generally borrow up to 80% of your home’s appraised value, minus what you still owe.
Example (illustrative numbers only):
- Home value: $600,000
- Maximum borrowing at 80%: $480,000
- Current mortgage balance: $350,000
- Potential equity available: up to $130,000
Your lender decides how much you actually qualify for, based on income, credit and debt ratios.
Why Canadians Refinance to Consolidate Debt
- Lower interest rates. Mortgage rates are usually well below credit card rates.
- One payment instead of many. This simplifies your budget.
- Lower monthly cash flow pressure. Spreading debt over a long amortization reduces the monthly payment.
The tradeoff is that you’re turning unsecured debt into debt secured by your home. If you can’t pay, the lender has a claim on the property.
What Does Refinancing Cost?
Don’t judge it by the rate alone. Ask about:
- Prepayment penalty. Breaking your mortgage early can cost three months’ interest, or an interest rate differential (IRD) on fixed terms. This is often the biggest cost.
- Appraisal fee. Often a few hundred dollars.
- Legal fees. Required to register the new mortgage.
- Possible discharge or administrative fees charged by your current lender.
Do the math: Add up all the costs, then compare them to your interest savings over the next few years. If the savings don’t clearly beat the costs, wait.
Refinance vs. HELOC vs. Second Mortgage
| Option | How it works | Best for |
|---|---|---|
| Refinance | Replace your mortgage with a bigger one | Large debts, big rate savings |
| HELOC | A revolving line of credit secured by your home (generally up to 65% of its value) | Flexible, ongoing or uncertain costs |
| Second mortgage | Borrow against equity without touching your first mortgage | Avoiding a large penalty, but rates are usually higher |
If your first mortgage has a big penalty to break, a HELOC or second mortgage may cost less than a full refinance.
Will You Qualify?
Lenders usually look at:
- Credit score. Higher is better, but some lenders work with lower scores.
- Debt-service ratios. Your total debts compared with your income.
- Income stability. Proof of employment or self-employment income.
- Home equity. More equity means more options.
If you’re self-employed or have a lower credit score, a mortgage broker can often access lenders your bank doesn’t offer.
Mistakes to Avoid
- Running up the cards again. Consolidating without changing your spending can leave you with the mortgage and new debt.
- Stretching amortization too far. A long amortization lowers payments but raises total interest.
- Ignoring the penalty. Always get the exact penalty figure in writing.
- Taking the first offer. Compare at least three lenders or use a broker.
Is Refinancing Right for You? A Quick Checklist
- You have high-interest debt costing you meaningfully more than a mortgage rate
- You have enough equity (generally 20% or more left after borrowing)
- The total refinance costs are clearly less than your projected savings
- You have a plan to avoid taking on new high-interest debt
If you can answer yes to most of these, refinancing may be worth exploring.
Frequently Asked Questions
Can I refinance with bad credit in Canada?
Sometimes. Alternative and private lenders may approve you, but rates and fees are usually higher.
How long does a refinance take?
Often a few weeks, depending on the appraisal, legal work and lender.
Does refinancing affect my credit score?
The lender will check your credit, which can cause a small, temporary dip. Paying off debts can help your score over time.
Is the money from a refinance taxable?
Generally, borrowed money isn’t taxed as income, but check your own situation with an accountant.
The Bottom Line
Refinancing can cut your interest costs and simplify your finances, but only if the numbers work and you change the habits that created the debt. Get your exact penalty, compare multiple offers, and talk to a licensed mortgage professional before you commit.
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