Refinancing replaces your current mortgage with a new one. Whether it pays depends on what you gain, what it costs to break your current mortgage, and how long you keep the new one. This page walks through the five common reasons to refinance and the numbers to check for each. For the mechanics (how much you can borrow, qualifying, costs and a checklist) see how to refinance your mortgage; the full set of guides is in the refinancing and home equity hub.
The basic test
Refinancing before your term ends costs money up front. FCAC says that if you break a closed mortgage “you normally pay a prepayment penalty”, and lists administration, appraisal, reinvestment and discharge fees to ask about. Breaking a closed mortgage, paying it off early or prepaying more than your privileges allow usually costs the higher of 3 months' interest and the interest rate differential (IRD) on a fixed rate, and typically 3 months' interest on a variable rate; your mortgage contract sets the exact method and comparison rate, and a federally regulated lender must tell you how it calculates the penalty. How mortgage penalties are calculated works through the methods.
Saving to date = monthly payment gap × months so far + (balance at the old rate − balance at the new rate)
Break-even point = the first month in which the saving to date is more than the penalty and fees
The saving to date is the interest saved: at the same balance and amortization, a lower rate lowers the payment and also leaves a lower balance. Dividing the penalty and fees by the payment gap alone leaves out the lower balance and puts the break-even point later than it is. Compare the break-even point with the months left in your current term: until the term ends you would otherwise keep paying your current rate, and after it ends you could renew or switch without a prepayment penalty, so savings counted past that point are less certain. The break-even guide works through the calculation.
Five reasons to refinance
| Reason | What has to be true for it to pay | When it may not |
|---|---|---|
| Lower interest rate | The interest saved over the months left in your current term exceeds the penalty and fees | Your term ends soon, or the penalty is large |
| Debt consolidation | The higher-interest debts are paid off and not run up again | The debt is spread over the amortization and costs more in total |
| Home equity for a project | You need a lump sum and can carry the larger payment | A smaller or ongoing need may suit a line of credit |
| Changing terms | The new amortization, rate type or payment schedule fits your plans | A longer amortization raises total interest |
| Life changes | A borrower needs to come off or go on the mortgage | The remaining borrower can’t qualify alone |
Reason 1: a lower rate
The saving comes from paying less interest on the same balance. The cost is the penalty and fees.
Example: a $420,000 balance with 22 years of amortization and 36 months left in the term. Illustrative figures: the current rate is 5.40%, a new 5-year rate of 4.10% is on offer, the lender quotes a penalty of $12,500, and legal, appraisal and discharge costs come to $1,900. Payments are for the same 22-year amortization, compounded semi-annually.
| Item | Current mortgage | After refinancing |
|---|---|---|
| Balance | $420,000 | $420,000 |
| Rate | 5.40% | 4.10% |
| Monthly payment | $2,708 | $2,410 |
| Monthly payment gap | $298 | |
| Balance after the 36 months left | $387,342 | $382,292 |
| Interest saved over the 36 months (payment gap × 36 + balance difference) | $15,778 | |
| Penalty and fees | $14,400 | |
| Break-even point | Month 33 |
Over the 36 months left, the lower rate saves about $15,778 in interest: $10,727 in lower payments plus a balance $5,051 lower at the end of the term. That is $1,378 more than the $14,400 cost, so the refinance pays for itself shortly before the term would have ended: the saving to date reaches $14,489 in month 33 (and $14,058 in month 32). Dividing the cost by the payment gap alone gives about 48 months, past the end of the term, because it leaves out the lower balance. If this were a closed variable-rate mortgage instead: On a closed variable-rate mortgage the penalty is typically 3 months' interest. At 5.40%, that is about $5,670 ($420,000 × 5.40% × 3 ÷ 12), so the cost would be $7,570, recovered in month 18 (saving to date $7,968; month 17: $7,529), well inside the 36 months left.
Your mortgage contract sets exactly how your lender calculates the penalty. The mortgage penalty calculator gives an estimate to compare with your lender’s figure. Before breaking a fixed-rate mortgage, compare a blend-and-extend, which FCAC says carries no prepayment penalty, though administrative fees may apply. Should I break my mortgage for a lower rate? goes deeper on this case.
Reason 2: debt consolidation
Rolling credit card or loan balances into the mortgage swaps a high rate for a mortgage rate. The catch is that the debt is now secured by your home and repaid over the mortgage’s amortization. FCAC warns that “you may face serious consequences, like the foreclosure of your home, if you can’t pay back the money you borrow”.
Example: $45,000 of other debt. Illustrative balances and rates: a credit card of $15,000 at 20.99%, another of $8,000 at 19.99%, and a car loan of $22,000 at 7.49%, added to a mortgage at 4.25% over 25 years.
| Debt | Balance | Rate | Interest for a year at that balance |
|---|---|---|---|
| Credit card 1 | $15,000 | 20.99% | $3,149 |
| Credit card 2 | $8,000 | 19.99% | $1,599 |
| Car loan | $22,000 | 7.49% | $1,648 |
| Total | $45,000 | $6,396 |
At 4.25%, the same $45,000 costs about $1,913 in interest for a year, and adds about $243 a month to the mortgage payment. Over the full 25 years, though, that $45,000 adds about $27,854 of interest, so the saving depends on paying the extra down faster than the amortization requires. The car loan in particular might have been paid off in a few years on its own.
What makes consolidation work is not running the cards back up. The trade-offs and the alternatives are in debt consolidation using home equity.
How much you can add. Under the Bank Act, a bank's loan to buy, renovate or improve a home, or a refinance of such a loan, together with any mortgage ranking equal to or ahead of it, can't exceed 80% of the home's value. The lender also checks that you can carry the larger payment: Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones.
Reason 3: home equity for a project
A refinance gives you one lump sum at a mortgage rate. It suits a large, known cost such as a renovation. A HELOC lets you draw only what you need, at a rate FCAC describes as variable, and is set up alongside your mortgage instead of replacing it. Cash-out refinance works through how much you can take out and what it costs.
If you invest the money or use it for a rental, the interest may be deductible: Interest is deductible when the borrowed money is used to earn income from a business or property, such as rent, interest or dividends, whatever secures the loan; it follows the money's current use, which you must be able to trace, and it isn't deductible on money used personally, on money borrowed for an RRSP, TFSA or FHSA contribution, or on an investment that can only produce capital gains.
Reason 4: changing your terms
| Change | What it does | Trade-off |
|---|---|---|
| Variable to fixed | Locks your rate for the new term | Check how the new contract’s prepayment penalty is calculated |
| Fixed to variable | Your rate moves when your lender’s prime rate changes | Payments or amortization can change when rates move |
| Longer amortization | Lowers the payment | FCAC: “The interest costs that you’ll need to pay will be higher” |
| Shorter amortization | Pays the mortgage off sooner | Higher payments |
| Accelerated payments | FCAC: “you make the equivalent of one extra monthly payment per year” | Your lender may let you change payment frequency without refinancing |
Some of these changes don’t need a refinance at all. Your contract’s prepayment privileges or a payment-frequency change may do the job without breaking the mortgage: see paying off your mortgage early and prepayment privileges.
Reason 5: life changes
| Situation | Where refinancing comes in |
|---|---|
| Separation or divorce | Taking one person off the mortgage needs the lender to approve the remaining borrower alone; a refinance can also pay out the other person’s share of the equity. See mortgage after divorce |
| Adding a partner | A mortgage is a contract between you and your lender (FCAC), so adding a borrower is a change to arrange with the lender |
| Inherited home with a mortgage | Beneficiaries don’t inherit the debt unless it was shared, but it stays with the estate, which uses its assets to pay debts before any inheritance is paid out (RBC) |
| Buying before selling | Porting your mortgage, bridge financing or a new mortgage are options to compare; see the bridge financing calculator |
Refinance now or wait for renewal?
At the end of your term there is no prepayment penalty, and FCAC points out: “You don’t have to renew your mortgage with the same lender.” If your mortgage is with a federally regulated lender, such as a bank, the lender must send you a renewal statement at least 21 days before your term ends, or tell you by then that it won't renew; the statement shows the balance, interest rate, payment frequency, term and any fees, and says the rate offered won't go up before the renewal date. FCAC suggests you “start shopping around a few months before the end of your term”. A switch at renewal for the same amount doesn’t add new money, though; borrowing more is still a refinance. Moving to a new lender can carry its own costs, which FCAC lists as discharge, registration, transfer or assignment fees, an appraisal if needed, and other administration fees.
| Your situation | Options to compare |
|---|---|
| Rate has dropped, term ends soon | Waiting for renewal, an early renewal, or a switch at renewal |
| Rate has dropped, years left, penalty is low | Refinancing, after a break-even check |
| Rate has dropped, years left, penalty is high | Blend-and-extend, or waiting |
| You need money for a project | A cash-out refinance, a HELOC, or a home equity loan |
| Small debts to consolidate | An unsecured line of credit or loan may avoid breaking the mortgage; see HELOC vs personal line of credit |
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 29, 2026 and October 2, 2026. How we check facts.
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Conventional 5-year mortgage rate (data series)
- Bank of Canada: Data table
- Canada Revenue Agency: Line 22100 – Carrying charges, interest expenses and other expenses
- Canada Revenue Agency: Income Tax Folio S3-F6-C1, Interest Deductibility
- CMHC: CMHC Refinance for Building Secondary Suites
- CMHC: CMHC Purchase
- Financial Consumer Agency of Canada: Mortgage fees: Prepayment penalties
- Financial Consumer Agency of Canada: Breaking your mortgage contract
- Financial Consumer Agency of Canada: Home equity lines of credit
- Financial Consumer Agency of Canada: Renewing your mortgage
- Justice Laws (Canada): Bank Act
- Justice Laws (Canada): Eligible Mortgage Loan Regulations
- OSFI: Residential mortgage underwriting practices and procedures
- OSFI: OSFI exempts uninsured mortgage straight switches from the prescribed MQR and…
- OSFI: Amendments to the minimum qualifying rate for uninsured mortgages
- RBC: Variable Rate Mortgage | RBC Royal Bank of Canada