Refinancing your mortgage in Canada can help you access better interest rates, tap into your home equity, or consolidate high-interest debt. However, refinancing is not the same as renewing your mortgage at the end of your term. When you refinance, you are breaking your existing mortgage contract before the term ends or changing the loan amount, which can trigger prepayment penalties and new qualification requirements.

This guide explains when refinancing makes sense, how the process works, what it costs, and how to navigate the OSFI mortgage stress test and other rules that apply in 2027.

What You Will Learn

  • The difference between refinancing and renewing your mortgage in Canada
  • When refinancing makes financial sense and when it does not
  • How to calculate prepayment penalties, including the interest rate differential (IRD)
  • The qualification requirements, including the mortgage stress test
  • Step-by-step instructions to refinance your mortgage
  • Common mistakes to avoid and tips to save money

What Is Mortgage Refinancing?

Refinancing means replacing your current mortgage with a new one before your term is over, or changing the loan amount. In Canada, your mortgage has two key timelines: the term (typically 1 to 5 years, the period your rate and conditions are locked in) and the amortization (the total payoff period, often 25 or 30 years).

At the end of your term, you renew your mortgage, which does not trigger penalties. But if you want to make changes before the term ends, such as switching lenders, lowering your rate, or accessing equity, you are refinancing.

Common reasons Canadians refinance include securing a lower interest rate, switching from a variable-rate to a fixed-rate mortgage, accessing home equity for renovations or debt consolidation, or removing a co-borrower from the title.

When Should You Refinance Your Mortgage?

Refinancing makes sense when the long-term savings or benefits outweigh the costs, particularly prepayment penalties. Consider refinancing if:

  • Interest rates have dropped significantly. If rates are at least 1 percentage point lower than your current rate and you have several years left on your term, the savings over the remaining amortization may exceed the penalty cost.
  • You need to consolidate high-interest debt. If you are carrying credit card balances or personal loans with interest rates above 10 per cent, refinancing to roll that debt into your mortgage at a lower rate can reduce your monthly payments. However, you are extending unsecured debt over a longer period, so calculate the total interest cost carefully.
  • You want to access home equity. According to the Financial Consumer Agency of Canada, you can refinance up to 80 per cent of your home’s current appraised value (FCAC, 2024). If your home has appreciated or you have paid down principal, refinancing lets you access that equity as cash.
  • You are switching from variable to fixed. If you are on a variable-rate mortgage and expect rates to rise, locking in a fixed rate through refinancing can provide payment certainty.

Do not refinance if your term is almost over (within 6 months of renewal, when penalties disappear), if the penalty cost exceeds the savings, or if you do not have enough equity to meet the 80 per cent loan-to-value cap.

How Much Does Refinancing Cost?

Refinancing triggers several costs. The largest is usually the prepayment penalty for breaking your mortgage contract early. The penalty depends on whether you have a fixed-rate or variable-rate mortgage.

For variable-rate mortgages, the penalty is typically three months of interest. For a $300,000 mortgage at 5 per cent, that works out to approximately $3,750.

For fixed-rate mortgages, the penalty is the greater of three months of interest or the interest rate differential (IRD). The IRD is the difference between your current rate and the rate your lender can charge today for the remaining term, multiplied by your outstanding balance and time left. IRD penalties can reach $10,000 or more on larger mortgages, especially if rates have fallen sharply since you locked in.

Other costs include:

  • Appraisal fee: $300 to $500 to verify your home’s current market value
  • Legal fees: $500 to $1,500 for title transfer and registration (if switching lenders)
  • Discharge fee: $200 to $400 charged by your current lender to close the old mortgage
  • Title insurance and registration: $200 to $400

Total costs typically range from $1,500 to $15,000 depending on the penalty size. Ask your lender for a penalty estimate before you commit.

Do You Need to Qualify Again?

Yes. Refinancing is treated as a new mortgage application. You must meet current lending rules, including the OSFI mortgage stress test. Under the Office of the Superintendent of Financial Institutions guidelines, you must qualify at the higher of your contract rate plus 2 percentage points or the OSFI benchmark rate (5.25 per cent as of mid-2026, though this rate changes) (OSFI, 2024).

For example, if you are refinancing at 4.5 per cent, you must prove you can afford payments at 6.5 per cent (4.5 per cent + 2 per cent). This stress test can reduce your borrowing power compared to when you first qualified.

You also need:

  • A minimum credit score of 600 to 680, depending on the lender (higher scores unlock better rates)
  • Stable income and a debt service ratio below 44 per cent (total debt payments divided by gross income)
  • At least 20 per cent equity in your home (loan-to-value ratio of 80 per cent or less)

If you are refinancing above 80 per cent LTV, you cannot proceed. If you originally put down less than 20 per cent and have CMHC mortgage insurance, that insurance does not transfer to a refinance for equity access or debt consolidation, only for renewals or switches at the same loan amount.

Step-by-Step: How to Refinance Your Mortgage in Canada

1. Calculate Your Prepayment Penalty

Contact your current lender and request a written penalty estimate. Provide the payoff date you are considering. Compare the penalty against your potential savings or the value of accessing equity.

2. Check Your Home Equity and Loan-to-Value Ratio

Your home must appraise high enough that your new loan does not exceed 80 per cent of its value. If you bought for $400,000 with a $320,000 mortgage and your home is now worth $450,000, you have $130,000 in equity and can refinance up to $360,000 (80 per cent of $450,000).

3. Shop for Rates and Compare Lenders

Contact multiple lenders and mortgage brokers. Rates vary by lender, term, and whether the mortgage is insured or uninsured. A broker can access rates from dozens of lenders at no cost to you. Compare not just the rate but also prepayment privileges (the ability to make lump-sum payments or increase monthly payments without penalty) and portability (whether you can transfer the mortgage if you move).

4. Submit Your Application and Documentation

You will need recent pay stubs or tax returns, proof of employment, a list of assets and debts, and consent for a credit check. The lender will order an appraisal to confirm your home’s value.

5. Review and Sign the New Mortgage Agreement

Once approved, review the commitment letter carefully. Confirm the rate, term, amortization, prepayment options, and all fees. Your lawyer will handle the discharge of the old mortgage and registration of the new one. Funds are typically advanced within 1 to 2 weeks of signing.

Common Mistakes to Avoid

  • Underestimating the IRD penalty. Fixed-rate mortgage penalties can be much larger than you expect. Always get a written estimate before committing.
  • Refinancing too close to renewal. If your term ends in 4 months, wait. The penalty disappears at renewal and you can switch lenders or renegotiate at no cost.
  • Ignoring your debt service ratios. The stress test is stricter than when you first qualified. If your income has not increased or you have taken on more debt, you may not qualify for the same loan amount.
  • Extending your amortization without calculating total interest. Refinancing to lower your monthly payment by stretching your amortization from 20 years back to 30 years reduces short-term cash flow but can add tens of thousands in interest over the life of the loan.

Tips to Save Money When Refinancing

  • Time your refinance strategically. If you are within 6 months of your renewal date, wait. If your lender allows a blend-and-extend option (blending your current rate with a new rate and extending the term), compare that cost to a full refinance.
  • Increase your payment frequency. Switching from monthly to biweekly accelerated payments can shave years off your amortization without refinancing.
  • Negotiate your rate. Lenders often have room to lower the posted rate, especially if you have strong credit and equity. Ask for a discount or show competing offers.
  • Avoid rolling all fees into the mortgage. Paying appraisal and legal fees upfront reduces the principal you are borrowing and the total interest cost.

Frequently Asked Questions

Can I refinance if I am self-employed?

Yes, but you will need to provide additional documentation, typically two years of tax returns and notices of assessment. Some lenders specialize in self-employed borrowers and may accept stated income with a larger down payment or higher rate.

Does refinancing hurt my credit score?

The lender will pull your credit report, which may lower your score by a few points temporarily. However, if you make payments on time after refinancing, your score will recover.

Can I refinance with bad credit?

If your credit score is below 600, traditional lenders may decline your application. Alternative lenders (B-lenders) or private lenders may approve you at a higher interest rate. Improving your credit score before refinancing will unlock better terms.

What is the difference between refinancing and a home equity line of credit (HELOC)?

A HELOC is a revolving credit line secured by your home, up to 65 per cent of its value. Refinancing replaces your mortgage entirely. A HELOC can be added as a second position behind your mortgage, or combined with your mortgage in a readvanceable product, without triggering a full refinance penalty if your mortgage term is not broken.

Conclusion

Refinancing your mortgage in Canada in 2027 can be a powerful financial tool when used strategically. Whether you are lowering your rate, accessing equity, or consolidating debt, the key is to calculate all costs, including prepayment penalties, and ensure the long-term benefit exceeds the upfront expense.

Start by requesting a penalty estimate from your current lender, checking your home equity, and shopping rates with multiple lenders or a licensed mortgage broker. Remember that refinancing is a new application, so you must pass the OSFI stress test and meet current qualification standards.

If you are within 6 months of your renewal date, waiting may save you thousands in penalties. For personalized advice on whether refinancing fits your situation, consult a licensed mortgage professional who can review your income, debts, and goals.

Financial Disclaimer: This article provides general educational information about mortgage refinancing in Canada and is not personalized financial, legal, lending, or tax advice. Mortgage rules, qualification requirements, prepayment penalties, and available products vary by province, lender, and your individual circumstances. Interest rates and lending guidelines change frequently. The OSFI mortgage stress test, loan-to-value limits, and CMHC insurance rules are current as of June 2026 and may be updated. For advice specific to your situation, consult a licensed mortgage broker, your financial institution, or the Financial Consumer Agency of Canada at canada.ca. This article does not constitute an offer or commitment to lend.