A refinance discharges your existing mortgage and registers a new one, potentially with a different lender, a different rate, a different amortisation and a different balance. Unlike a renewal, it happens when you choose rather than at maturity, which is exactly why it costs something.
You can refinance up to eighty percent of your home's current appraised value. That ceiling is fixed by regulation and it is the first constraint on any plan.
The five reasons people refinance
To take equity out. The most common. A renovation, a down payment on a second property, a business injection, a child's education, or a divorce settlement. See cash-out refinancing.
To consolidate expensive debt. Moving credit cards and loans onto the mortgage cuts the interest rate by a factor of three or four. Financially sound and behaviourally dangerous, for reasons covered on debt consolidation.
To lower the payment. By extending the amortisation, which reduces the monthly figure and increases total interest. A legitimate move when cash flow is genuinely tight. See lowering a payment.
To capture a much lower rate. Only worth it when the drop is large enough to exceed the penalty. Rarer than people assume, and the arithmetic is unforgiving.
To remove or add a person. Separation, a partner buying out the other, or removing a co-signer. Usually not optional. See spousal buyouts.
What it costs
The penalty. Almost always the dominant cost, and the thing that decides whether a refinance makes sense. On a variable mortgage it is usually three months interest, which is manageable. On a fixed mortgage it is the greater of three months interest or an interest rate differential, and the differential can run to five figures. Work it out before anything else. The penalty page shows both calculations.
Legal fees. Discharging the old mortgage and registering the new one, typically several hundred to around a thousand dollars.
Appraisal. Required on a refinance, because the eighty percent limit is against current value. Three to five hundred dollars.
Registration and discharge fees. Modest in Alberta.
A worse rate, potentially. A refinance is always uninsured, even if your original mortgage was insured. Uninsured mortgages price higher, so you may lose a good rate as well as pay to leave it. This catches people who assume they will simply re-establish their existing rate on a larger balance.
The break-even test
The only calculation that matters. Add up every cost of refinancing, then work out what you save each month, then divide.
If the total cost is $9,000 and refinancing saves $340 a month, you break even in about twenty-six months. If you will hold the mortgage well beyond that, it works. If you are moving in eighteen months, it does not.
For a debt consolidation, use the honest saving: the difference between what you were paying on the debts and what you now pay on the larger mortgage, over the same period. Comparing a five-year credit card payoff against a twenty-five year mortgage is not a saving, it is a longer sentence at a lower rate.
Refinancing is a full application
Not a renewal. Credit is pulled, income is verified, the property is appraised, and the stress test applies at the greater of your contract rate plus two percent or 5.25 percent.
That last point stops a meaningful number of refinances. People who qualified comfortably years ago at lower prices and lower rates sometimes cannot qualify to refinance today, particularly if they are now self-employed or carrying more debt. It is worth checking early rather than building a plan on an assumption.
Wait for renewal if you can
The cheapest refinance is the one done at maturity, because there is no penalty. If your renewal is within six months and the need is not urgent, waiting is almost always right.
If you cannot wait, look at whether a home equity line of credit or a second charge behind your existing mortgage would work instead. Both leave a good existing rate intact, which is often worth more than the rate advantage of refinancing everything.
What Chad does is run the penalty, the break-even and the alternatives side by side before anything is committed, including the option of doing nothing. Sometimes the honest answer is to wait four months.