When does it make sense to refinance?
When the interest you save over the remaining term exceeds the penalty plus legal and appraisal costs, or when you need to consolidate higher-rate debt. Do the arithmetic; do not refinance on a feeling that rates look better.
Refinancing mid-term means breaking your mortgage, so the penalty is the first number. On a fixed mortgage that is the greater of three months' interest and an interest rate differential, and at lenders that calculate the differential on posted rates it can be large enough to kill the case on its own. Add legal fees and an appraisal.
Against that, total the interest saved over the remaining term at the new rate. If the saving exceeds the total cost, it works. Some lenders will blend and extend instead, which avoids the penalty and usually gives a worse rate, so compare that too.
The stronger case is debt consolidation. Moving high-rate consumer debt into a mortgage can cut the interest rate dramatically. The risk is equally real: you have converted unsecured debt into debt secured against your home, and stretched it over decades. It only works if the spending that created the debt has stopped.
Also note that a refinance is a full application, requalification included. The ceiling this app models is eighty percent of the property's value, the same eighty percent it treats as the line between an insured and an uninsured mortgage. Nobody here has asked a lender what it will actually go to, so confirm the ceiling with yours.
What it depends on
- your penalty and how the lender calculates it
- how much of the term remains
- the rate gap
- whether you are consolidating higher-rate debt
Answer it with your own numbers
You will need: current balance, current rate, months left in term, new rate.
Compare refinancing against staying putNext questions
What is a mortgage penalty and how is it calculated?
On a variable it is normally three months' interest. On a fixed it is the greater of three months' interest and an interest rate differential, and the way your lender calculates that differential can change the bill by thousands.
Canada-wide
What is a HELOC and should I get one?
A revolving line of credit secured against your home, at a variable rate above prime, usually available up to a limit combined with your mortgage. Useful for a renovation with a repayment plan, dangerous for anything else.
Canada-wide