What is a Mortgage Refinance?

The Quick Answer

A mortgage refinance is when you replace your existing mortgage with a new one. Instead of just renewing at maturity, you’re breaking your current contract and setting up new terms.

That means:

• A new mortgage contract

• A new rate and amortization

• Sometimes a new lender

• And possibly new money in your pocket

Why People Refinance

• Lower rates: Replace your old higher rate with today’s lower one (if savings outweigh penalties).

• Access equity: Pull out cash for renovations, debt consolidation, or investments.

• Change loan type: Switch from variable to fixed (or vice versa).

• Add/remove borrowers: Update who’s on title or mortgage.

• Reset amortization: Stretch payments out to lower your monthly costs.

When Does Refinancing Make Sense?

A refinance isn’t just about chasing a lower rate. It’s about using your home equity strategically. Common scenarios:

• Consolidating debt: Roll high-interest credit cards, car loans, or personal loans into your mortgage. Instead of paying 19%+ on a credit card, you’re paying mortgage rates.

• Pulling equity at a better rate: If you need extra funds for renovations, investments, or family support, refinancing can let you borrow at a lower rate than most other loan types.

• Big-ticket purchases: Vehicles, trailers, cottages, general investments; many clients choose to refinance rather than finance these items separately at higher rates.

How It Works Step by Step

1. Review your current mortgage.
   Look at your balance, rate, maturity date, and penalty structure.

2. Calculate the penalty (if breaking early).

   • Variable = 3 months’ interest

   • Fixed = Greater of 3 months’ interest or the Interest Rate Differential (IRD)

   • Big 5 banks often inflate IRD penalties using “posted rates,” while monoline lenders calculate more fairly. Read more about it here!

3. Compare costs and savings.
   If the new structure saves more than the penalty + fees, it can make sense.

4. Apply with a broker.
   We shop dozens of lenders (banks, credit unions, monolines) to find the best fit.

5. Close the new mortgage.
   Your old one gets paid out, the new one is registered, and if you’re taking out equity, funds are advanced at this stage. A lawyer would re-register the mortgage.

Example: Refinancing to Access Equity

Let’s say you bought a home for $600,000. Today, it’s worth $800,000 and you owe $300,000 on your mortgage.

• Maximum refinance = 80% of current value = $640,000

• Pay off existing $300,000 balance

• Leaves up to $340,000 in cash available

That money could be used for renovations, debt consolidation, investing, or other big goals.

Refinancing Into a Mortgage + HELOC Combo

One option many Canadians don’t realize exists is the readvanceable mortgage - a hybrid product that combines a traditional mortgage with a HELOC (Home Equity Line of Credit).

Here’s how it works:

• Your mortgage is split into two parts: a standard amortizing mortgage + a HELOC.

• As you pay down the mortgage, that paid-down principal becomes instantly available on the HELOC side.

• The HELOC limit grows automatically, giving you ongoing access to equity without reapplying or paying new setup fees.

Why people like this option:

• Flexible access to equity for renovations, investments, or emergencies.

• Lower interest than credit cards or personal loans.

• You can lock in portions of the HELOC if you need a fixed payment schedule.

What to watch out for:

• Because the credit keeps growing as you pay down, some people treat it like an ATM and end up never reducing their debt.

• Rates on HELOC balances are usually variable and higher than fixed mortgage rates.

What to Watch Out For When Refinancing

Refinancing can be powerful, but there are real costs and trade-offs.

• Legal fees: Since your old mortgage is discharged and a new one registered, you’ll need a lawyer. Expect $1,200–$2,000 in fees.

• Penalties: Breaking early means paying a penalty. For variable rates, it’s usually 3 months’ interest. For fixed, it’s the greater of 3 months’ interest or the IRD. With Big 5 banks, IRDs can hit $15,000–$25,000, sometimes even more.
  Want the full breakdown? Read my post on mortgage penalties here.

• Restarting the clock: Most refinances reset your amortization to 30 years unless you choose otherwise. This lowers payments but stretches out your debt timeline. You can speed things back up with accelerated repayment. Read my post on repayment strategies here.

Bottom Line

A refinance can lower your payments, unlock equity, or consolidate debt, but it’s not always the right move. Between penalties, legal fees, and a reset amortization, the costs can outweigh the benefits if you’re not strategic.

At VeloMortgage, we run the numbers side-by-side and tell you the truth: when refinancing makes sense, and when it doesn’t.

Thinking about a refinance? Let’s crunch the math together before you sign anything.

Jeff Dinsmore
Mortgage Broker
FSRA # 10315
TMG - The Mortgage Group
VeloMortgage.ca