When does refinancing not make sense?

In Canada, refinancing usually does not make sense when the penalty and costs of breaking your mortgage are larger than what you would save. Waiting can be cheaper if your term ends soon. Refinancing is also a poor fit when the new loan only moves short-term debt onto a 25-year schedule with no plan to repay that debt. A refinance is also a poor fit when the larger payment would stretch your budget.

When the numbers or the timing do not work

Breaking a fixed mortgage mid-term usually costs the higher of three months' interest or the interest rate differential (IRD), which compares your rate with the lender's current rate for your remaining term (source: Financial Consumer Agency of Canada). On top of that come legal fees, an appraisal and any discharge fee.

Here is a simple check, using illustrative figures. If refinancing would save you $150 a month but cost $8,000 in penalty and fees, the refinance takes over four years to break even. If your term ends in two years, you would be ahead by waiting. The penalty estimator gives a rough figure for your own penalty.

At the end of your term, you can refinance, switch lenders or pay down your mortgage without a prepayment penalty. Federally regulated lenders must send a renewal statement at least 21 days before the term ends, but you can start comparing well before that. If you are within several months of renewal, waiting to refinance at renewal often pays.

When a refinance stretches the debt or your budget

Rolling credit card or car debt into your mortgage lowers the payment. But paying that debt off over 25 years can cost more in total interest than paying it off faster at a higher rate. A refinance helps most when you keep paying down the debt quickly and do not run the cards back up.

A larger mortgage means a larger payment, and you must qualify for it at the greater of your contract rate plus 2 percentage points, or 5.25%. Passing the stress test is not the same as being comfortable. If losing a job or a rise in rates would put the home at risk, borrowing less, or not at all, may be the honest answer.

The same caution applies to using equity to invest. If the investment falls, the mortgage stays.

When you do not have the equity

With a federally regulated lender, a refinance is capped at 80% of your home's appraised value. If you are already near that line, an institutional refinance may add little. An alternative lender or second mortgage might lend more, but at a higher cost with fees. Higher-cost borrowing suits only a specific need with a short, clear repayment plan.

What can work instead of a refinance

• Renew and prepay: use your prepayment privileges to pay down the mortgage without a penalty.
• A HELOC behind your existing mortgage, if you qualify, for needs that come in stages.
• A blend and extend with your current lender, if it offers one: some lenders let you add money mid-term at a blended rate instead of a full break.
• A budget fix for the underlying cash-flow problem, which no mortgage can solve on its own.

What to do next

If you are not sure whether refinancing is worth it, use our call-me-back form and we will compare refinancing with staying put. You can also read about your options at renewal.