If you’re a homeowner in Canada, you’ve probably heard about mortgage refinancing and maybe even wondered if it’s the right move for you. Refinancing can be a smart way to lower your monthly payments, access home equity, or switch to more favorable loan terms. But it’s not always the right choice for everyone.
So, when should you refinance your mortgage? Let’s break down how refinancing works, when it makes sense, and whether you should consider it especially if your mortgage rate is 6.5% and interest rates start to fall.
What Does It Mean to Refinance a Mortgage?
Refinancing your mortgage means replacing your current mortgage with a new one — often with a different term, rate, or lender.
When you refinance, the new loan pays off your existing mortgage, and you start making payments under the new agreement.
Canadians usually refinance for one or more of these reasons:
- To get a lower interest rate and reduce monthly payments
- To access home equity for renovations, investments, or debt consolidation
- To change the mortgage term (for example, from 25 years to 20 years)
- To switch from a variable to a fixed rate for payment stability
- To add or remove a borrower from the mortgage
Refinancing can save you money in the long term, but timing and circumstances are crucial.
When Is the Right Time to Refinance Your Mortgage?
Deciding when to refinance depends on your financial goals and the current state of your mortgage. Here are a few situations where refinancing may make sense:
1. When Interest Rates Drop
If mortgage rates have fallen since you first signed your mortgage, refinancing could help you secure a lower rate and reduce your monthly payments.
For example, if your current rate is 6.5% and rates drop to 5%, refinancing could significantly reduce your interest costs over the life of your loan. However, you’ll need to factor in penalty fees for breaking your current mortgage — especially if you’re with a big bank. Sometimes the penalty can offset the savings, so it’s crucial to do the math (or ask a mortgage broker to do it for you).
2. When You Need Access to Home Equity
If you’ve built up significant equity in your home, refinancing can allow you to access that money for things like:
- Home renovations or upgrades
- Paying off high-interest debt (credit cards or personal loans)
- Investing in another property
- Funding education or major expenses
This is often done through a cash-out refinance or a home equity line of credit (HELOC). In Canada, you can typically borrow up to 80% of your home’s appraised value (minus the remaining mortgage balance).
3. When You Want to Consolidate Debt
If you’re juggling multiple high-interest debts, refinancing your mortgage can be a practical way to simplify payments and save on interest.
By rolling debts into your mortgage, you benefit from lower mortgage rates (usually much lower than credit card or loan rates). This can make monthly payments more manageable and help you regain financial control.
4. When Your Financial Situation Has Improved
If your income has increased or your credit score has improved since you first got your mortgage, you may now qualify for better loan terms. Refinancing in this case can help you:
- Lock in a lower rate
- Pay off your mortgage faster
- Build equity more quickly
It’s an excellent opportunity to align your mortgage with your current financial goals.
5. When You Want to Change Your Mortgage Type or Term
Refinancing can also help you switch between mortgage types — for example, from a variable rate (which fluctuates with market rates) to a fixed rate (which provides predictable payments).
If you’re nearing retirement, you might prefer the stability of a fixed-rate mortgage. Or, if you want to pay off your home faster, you might refinance into a shorter-term mortgage.
My Mortgage Rate Is 6.5%. Should I Refinance If Rates Fall?
This is one of the most common questions Canadian homeowners ask — and the answer depends on several factors.
If your current mortgage rate is 6.5% and rates start to fall to 5.5% or lower, refinancing could be worth considering. Here’s how to decide:
1. Calculate Your Break-Even Point
Refinancing isn’t free. You’ll need to pay:
- A mortgage break penalty (if you break early)
- Possible appraisal or legal fees
- A new mortgage setup fee (depending on the lender)
The key question is: Will the savings from a lower rate outweigh the costs of refinancing?
For example:
If refinancing saves you $300 per month, but you pay a $4,000 penalty, your break-even point would be about 13–14 months. If you plan to stay in your home longer than that, refinancing may be a good option.
2. Consider Your Mortgage Term
If you’re near the end of your mortgage term, it may be smarter to wait until renewal instead of refinancing early. That way, you can avoid hefty penalties and still benefit from lower rates once your term expires.
3. Think About Your Long-Term Plans
If you plan to sell your home soon, refinancing might not be worth the effort or cost. However, if you plan to stay in the same place for several years, locking in a lower rate can result in substantial savings.
4. Talk to a Mortgage Professional
Every situation is unique. A qualified Canadian mortgage broker can compare your current loan, penalties, and future savings — helping you make an informed decision that fits your financial goals.
Pros and Cons of Refinancing Your Mortgage
Like any financial move, refinancing has both advantages and disadvantages.
Pros
- Lower interest rate and monthly payments
- Access to home equity for significant expenses
- Opportunity to consolidate high-interest debt
- Option to change your mortgage type or term
Cons
-
Penalty fees for breaking your mortgage early
- Possible closing or legal costs
- May extend your amortization period (paying more interest over time)
- Always review the numbers carefully before making a decision.
How to Refinance a Mortgage in Canada
The refinancing process is straightforward but requires preparation:
- Review your current mortgage and check for prepayment penalties.
- Compare mortgage rates from different lenders or use a mortgage broker.
- Calculate potential savings to ensure refinancing makes financial sense.
- Gather your financial documents (income proof, tax returns, and credit report).
- Apply for the new mortgage and sign the closing documents once your application is approved.
The entire process typically takes 2–4 weeks, depending on your lender and the documentation required.
Final Word
Refinancing your mortgage can be a powerful financial tool — if used wisely. It can help you lower your payments, shorten your mortgage term, or access your home equity for essential needs. If your mortgage rate is around 6.5%, refinancing could make sense when interest rates drop — but it’s essential to weigh the potential savings against penalties and fees. The best decision is one that is informed and well-reasoned. Speak with an experienced Canadian mortgage professional who can guide you through your options, calculate your break-even point, and find the most suitable lender for your needs.
Ready to explore your refinancing options? Book a free consultation with our mortgage experts today and take the first step toward smarter savings and long-term financial stability.