How Does Refinancing Work?

A couple looking around amid boxes in their home

What is Mortgage Refinance?

A refinance alters the terms and conditions of your existing mortgage – it’s essentially a new mortgage. Specifically, you are increasing the amount of your mortgage, whether to pay off consumer debt, finance a renovation, invest, or to get a lower rate.

Something to point out: When you want to access equity in your current home, the mortgage guidelines/rules are totally different from the mortgage rules in place for purchase transactions.

When refinancing (accessing your equity) the maximum new mortgage (or existing mortgage plus any Home Equity Lines of Credit) is limited to 80% of the appraised property value.

The Lender will request a full appraisal report completed by a licensed appraiser to determine current property value.

For example:

Your home is appraised at $1,150,000

80% of the appraised value would be a $920,000 new mortgage.

Then we have to subtract the existing mortgage + penalty, to determine any available equity left to be used:

$920,000 - ($827,000 approximate outstanding mortgage + $27K penalty) = $66,000 available equity 

Example #2: 

Property appraised at $1,200,000

80% of the appraised would be a $960,000 new mortgage.

$960,000 - ($827,000 approximate outstanding mortgage + $27K penalty) = $106,000 available equity 

As you can see, the appraised property value plays a huge role in the maximum amount you will be able to get from the refinance.

Something to point out though - since property values have been skyrocketing, appraisers are extremely cautious now and more conservative in determining property values.

Also, the cost of the appraisal will be about $350 to $400 plus HST, and it is your cost (the borrower) cost to cover.