What Is a Mortgage Refinance?

A mortgage refinance means paying off your existing mortgage and replacing it with a new one, either with your current lender or with a different lender. Homeowners usually refinance to change their mortgage terms, or to access the equity in their home for renovations, education costs or paying down other debt. Because a refinance involves registering a new mortgage on title and discharging the old one, there is more to consider than the interest rate.

How a Refinance Differs From a Renewal or a Switch

When your mortgage term ends and you sign a new term with the same lender, that is a renewal. When your term ends and you move the same balance and amortization to a different lender, that is a switch. A refinance is when you increase the amount you borrow or change the amortization or structure of the loan, which requires a new credit application and a new registration on title.

How Much Can You Borrow?

With a conventional refinance, your total borrowing, including your existing mortgage balance, can be up to 80% of your home’s value. For example, if your home is appraised at $1,000,000 and you owe $450,000, your total mortgage can be $800,000, which leaves as much as $350,000 in additional funds before costs. Your lender sets the actual limit based on the appraisal, your income and your credit.

Mortgage loan insurance, such as CMHC insurance, is generally limited to home purchases, so an ordinary refinance cannot go above 80% of your home’s value. One exception has applied since January 15, 2025: homeowners adding a secondary suite can refinance with mortgage insurance for up to 90% of the home’s value after the work is done. The value after improvements must be under $2 million, the property can have no more than four units, and the additional funds cannot exceed the cost of the work or be taken out as cash for other purposes.

How Lenders Qualify You

When a federally regulated lender, such as a bank, approves an uninsured mortgage, it must confirm that you could afford payments at the minimum qualifying rate. That rate is the greater of your contract rate plus 2% or 5.25%, and it is commonly called the stress test. Since November 21, 2024, the stress test no longer applies when you switch lenders at renewal without increasing your loan amount or amortization. A refinance that increases what you borrow does not fall within that exception.

Check the Prepayment Penalty First

If you refinance before the end of your current term, you are paying off your mortgage early and may owe a prepayment penalty. The penalty is usually the higher of three months’ interest or the interest rate differential (IRD), and the IRD tends to be larger when your contract rate is higher than current rates. Federally regulated lenders must set out your prepayment privileges and how penalties are calculated in an information box at the start of your mortgage agreement.

Ask your current lender for a written penalty statement so you can compare the savings from refinancing against the penalty, legal fees and appraisal costs. Refinancing at the end of your term avoids the penalty. In addition, under the federal Interest Act, an individual borrower whose mortgage term is longer than five years can repay it after five years with three months’ interest.

Second Mortgages and HELOCs

A refinance replaces your existing mortgage. A second mortgage leaves your first mortgage in place and adds a second loan secured on your home. It is generally limited to 80% of your home’s appraised value, minus the balance of your first mortgage. If the home is sold, the first mortgage is paid out before the second, so second mortgages usually carry higher interest rates, and you must keep up payments on both loans.

A home equity line of credit (HELOC) lets you borrow as needed against your home, within a credit limit of up to 65% of its value. A HELOC combined with a mortgage must be with the same lender and requires at least 20% equity, and the credit available to you increases as you pay down your mortgage principal.

Second mortgages from private lenders are easier to qualify for but cost more and often have short terms, so before you sign, plan how you will repay the loan when it comes due.

Your Spouse’s Consent Is Required, Even If Only You Are on Title

Under Ontario’s Family Law Act, the home that a married couple ordinarily occupies as their family residence is a matrimonial home, even if only one spouse is on title. A spouse cannot mortgage a matrimonial home unless the other spouse signs or consents, subject to limited exceptions such as a release of those rights in a separation agreement or a court order. This rule applies to married spouses, not common-law partners. If you are separated or expect to separate, get legal advice before you refinance.

Changing Title While Refinancing Can Trigger Land Transfer Tax

A mortgage is registered to secure a debt, so a refinance on its own does not attract Ontario land transfer tax. However, if you add or remove a person on title as part of the refinance, an interest in the property is transferred, and the share of the mortgage balance attached to that interest can count as taxable consideration. For a home in Toronto, the City of Toronto’s municipal land transfer tax must be considered in the same way. Transfers between spouses may be exempt if certain conditions are met, so confirm the tax position before you change title.

What Your Lawyer Does on a Refinance

Mortgages in Ontario are registered electronically, and only a licensed lawyer can make the statements of legal compliance that registration requires. On a refinance, your lawyer searches title and executions, reviews the new lender’s commitment and mortgage terms with you, obtains a payout statement from your existing lender, pays out and arranges the discharge of the old mortgage, registers the new mortgage and then releases the remaining funds to you. If a guarantor is involved, your lawyer also confirms whether independent legal advice is required.

If your new mortgage is registered as a collateral charge, moving to another lender later may involve the cost of a new registration, so it is worth confirming how your mortgage will be registered.

How Jenna Lee Law Can Help

Jenna Lee Law acts on refinances and second mortgages, including registration and closing, adding or changing names on title and spousal consent for a matrimonial home. Our principal lawyer is also a Chartered Professional Accountant (CPA), so the tax consequences of how you use the funds and any land transfer tax on a change of title are reviewed at the same time.