Refinancing a mortgage in Ontario: when it pays and what it costs
Refinancing means replacing your current mortgage with a new one before the term ends — either to get a lower rate, to pull equity out of your home, or to change the amortization. In Toronto, where a typical balance is several hundred thousand dollars, a one-point rate difference can be worth $300 a month. The question is whether that saving beats the cost of breaking the mortgage you have.
The three reasons people refinance
- A lower rate: rates fell through 2024 and 2025, so borrowers who locked in fixed terms in 2022–2023 at 5.5–6% may be paying well above the market.
- Equity take-out: federally regulated lenders allow a refinance up to 80% of appraised value. On a Leslieville semi appraised at $1,500,000 with $700,000 owing, that is up to $500,000 available for renovations, an investment property or debt consolidation.
- A longer amortization: resetting to 30 years lowers the payment — useful in a cash-flow crunch, expensive over the life of the loan.
The prepayment penalty is the whole decision
Variable-rate mortgages charge three months’ interest to break — on $700,000 at 4.5% that is about $7,900. Fixed-rate mortgages charge the greater of three months’ interest or the Interest Rate Differential (IRD). The IRD is the gap between your contract rate and the rate the lender would charge today for a term matching your remaining time, multiplied by your balance and the months left. The big banks calculate it from their posted rates rather than their discounted ones, which can produce penalties of $20,000–$40,000 on a Toronto-sized mortgage with three years left. Monoline lenders and credit unions generally use their actual rates and produce far smaller IRDs. Always get the penalty in writing before you decide.
Costs beyond the penalty
A refinance is a new mortgage, so expect an appraisal ($300–$500), legal fees or a lender’s title-transfer service ($800–$1,500), possible discharge fees from the old lender ($200–$400) and, if you move to a new lender, a title-insurance update. Some lenders cover part of these for switch business. Add them to the penalty to get your real break-even cost.
How to read the calculator
The tool above compares the payment and total interest on your current balance at your existing rate against the same balance at a new rate. The “monthly saving” is gross; subtract your penalty and closing costs, then divide by the monthly saving to get the number of months until you are ahead. If that number is longer than the time you plan to keep the home — or longer than the new term — refinancing does not pay.
Refinance vs renewal vs blend-and-extend
At renewal, your term ends and you can switch lenders for a better rate with no penalty; the balance and amortization carry over, and since 2024 straight switches at renewal no longer require re-passing the stress test. A refinance changes the amount or amortization and always requires requalifying at the stress-test rate. A blend-and-extend, offered by most banks, mixes your current rate with today’s rate into a new, longer term with no penalty — it avoids the IRD but usually leaves you paying more than a clean refinance would over the full term.
Requalifying: what lenders check
Refinanced mortgages are uninsured, so you qualify at the higher of 5.25% or the new contract rate plus 2 points, within 32–39% GDS and 40–44% TDS. If you have taken on car loans or lines of credit since the original approval, or your income has changed, run the affordability calculator first.
Rules cited: OSFI Guideline B-20 (80% refinance loan-to-value, qualifying rate); Interest Act s.10 (three months’ interest after five years); lender penalty disclosure under the Bank Act cost-of-borrowing regulations. Penalty figures are illustrative — your lender’s written quote governs.