The Cost of Mortgage Refinancing

Refinancing a mortgage in Canada can be a powerful financial tool, whether a homeowner is looking to access equity, lower their interest rate, or consolidate debt. However, it’s essential to understand the costs associated with refinancing before making a decision. While refinancing can provide financial flexibility, the expenses involved can vary significantly depending on whether a borrower stays with their current lender, opts for a blend-and-extend strategy, or moves to a new lender altogether.

Understanding the Costs of Refinancing

List of Costs

Refinancing Costs Subject to Sales Tax

Scenario 1: Staying with the Same Lender

Scenario 2: Blend and Extend Strategy

Scenario 3: Moving to a New Lender

Understanding the Costs of Refinancing

Refinancing a mortgage involves breaking an existing loan and replacing it with a new one, often at a different interest rate and term. The primary costs associated with refinancing include mortgage penalties, legal fees, appraisal costs, and potential discharge and registration fees.

A major cost consideration is the mortgage penalty. If a borrower is in a fixed-rate mortgage, lenders typically charge either an interest rate differential (IRD) penalty or three months’ interest, whichever is higher. IRD penalties can be substantial if current rates are lower than the borrower’s existing rate. Conversely, variable-rate mortgage holders usually only pay a three-month interest penalty.

Other costs include legal fees, typically ranging from $800 to $2,500, and appraisal fees, which can cost between $300 and $600. If the borrower is switching lenders, a mortgage discharge fee of approximately $200 to $400 applies, as well as a mortgage registration fee of around $50 to $100. Title insurance, often required by lenders, can add another $250 to $500.

List of Costs

Yes, when you refinance your mortgage in Canada, aside from mortgage penalties (if applicable), there are several other fees you should be prepared for:

1. Legal Fees

• You’ll need a lawyer or notary to register the new mortgage.
• Fees typically range from $800 to $2,500, depending on the province and complexity of the refinance.

2. Appraisal Fees

• Lenders often require a new property appraisal to confirm its market value.
• Costs range from $300 to $600 but can be higher in some cases.

3. Mortgage Discharge Fee

• If you’re switching lenders, your previous lender may charge a discharge fee.
• Typically $200 to $400, varying by lender and province.

4. Title Insurance (if required)

• Some lenders require title insurance to protect against fraud or title defects.
• Costs typically range from $250 to $500.

5. Registration Fee

• Charged to register the new mortgage with the provincial land registry.
• Usually $50 to $100, depending on the province.

6. Bridge Loan Fees (if applicable)

• If you’re refinancing to fund a purchase before selling your current home, you may need a bridge loan.
• Costs vary but include an administration fee ($200 to $500) plus interest.

7. Home Insurance Adjustments

• If you increase your mortgage amount, your lender may require proof of updated home insurance coverage, potentially leading to higher premiums.

Refinancing Costs Subject to Sales Tax

These fees typically include HST (Ontario, Atlantic provinces) or GST (other provinces):

1. Legal Fees
   • Lawyers and notaries charge HST/GST on their professional services.
   • Example: If legal fees are $1,500 in Ontario (13% HST), the tax would be $195, bringing the total to $1,695.
2. Appraisal Fees
   • Mortgage appraisals are considered a service and are taxable.
   • Example: If an appraisal costs $400 in Ontario, 13% HST adds $52, making the total $452.
3. Title Insurance (if purchased through a lawyer)
   • Lenders often require title insurance, which is taxable if purchased as a standalone product.
   • Example: If title insurance is $300 in Ontario, HST is $39, bringing the total to $339.
4. Administrative or Lender Fees (if applicable)
   • Some lenders charge processing fees, which may be subject to tax.
   • Example: A $500 administration fee may include GST/HST, depending on the lender.

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Refinancing Costs That Are NOT Subject to Sales Tax

The following costs do not have GST/HST applied:

1. Mortgage Discharge Fees
   • Charged by the current lender to discharge the old mortgage.
   • No sales tax applies.
2. Mortgage Penalties (IRD or Three-Month Interest)
   • These penalties are a financial charge rather than a service, so no tax applies.
3. Land Title Registration Fees
   • Provincial governments charge a mortgage registration fee, which is not subject to tax.

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Summary of Taxable vs. Non-Taxable Fees

Refinancing Cost	Taxable?	Reason
Legal Fees	✅ Yes	Professional service subject to HST/GST
Appraisal Fees	✅ Yes	Service fee subject to HST/GST
Title Insurance	✅ Yes	Tax applies when purchased separately
Lender Admin Fees	✅ Yes	Depends on lender policy
Mortgage Discharge Fee	❌ No	Government or lender charge
Mortgage Penalty (IRD or 3-month)	❌ No	Considered a financial charge
Land Title Registration Fee	❌ No	Government charge

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How Much Sales Tax Should You Expect?

Sales tax depends on the province where the refinancing takes place:

• Ontario, New Brunswick, Newfoundland, Nova Scotia, PEI → 13% HST
• Alberta, BC, Saskatchewan, Manitoba, Quebec → 5% GST (no HST)
• Quebec also has 9.975% QST (if applicable).

Scenario 1: Staying with the Same Lender

Many homeowners choose to refinance with their existing lender to minimize costs and avoid the hassle of switching. In this scenario, the borrower avoids mortgage discharge fees and may receive preferential treatment in terms of fees and approval time.

For example, a homeowner with a $500,000 mortgage at 3% who has been in a five-year fixed term for three years wants to refinance to access $200,000 in equity. If current rates have increased to 5%, the IRD penalty might be negligible or could default to a three-month interest penalty, roughly $3,750. The borrower would still need to pay legal fees and an appraisal fee, bringing the total cost to approximately $5,000 to $7,000.

The advantage of this approach is cost efficiency and a faster approval process. However, a significant drawback is that the existing lender may not offer the most competitive rates, which could cost the borrower more in interest over time.

Scenario 2: Blend and Extend Strategy

For borrowers looking to avoid high penalties, some lenders offer a blend and extend option. This strategy allows the borrower to blend their current mortgage rate with a new, higher rate while extending the term. This can minimize or eliminate penalties while securing additional funds.

Using the same homeowner scenario, if the lender offers a blended rate of 3.7% for a five-year term, the borrower avoids the full IRD penalty. Instead, they accept a middle-ground interest rate that is higher than their original rate but lower than current market rates. The borrower still pays legal and appraisal fees, but the overall cost remains lower than breaking the mortgage completely.

The primary benefit of a blend and extend is penalty savings and interest rate stability. However, the downside is that not all lenders offer this option, and the borrower may still pay more in interest compared to switching to a lender with a better rate.

Scenario 3: Moving to a New Lender

Switching to a new lender can be financially beneficial if it results in a significantly lower interest rate. However, this option comes with additional costs, including the full mortgage penalty, legal fees, appraisal fees, and mortgage discharge and registration fees.

If the borrower chooses to switch lenders to access a 4% rate instead of blending at 3.7%, the full IRD penalty (estimated at $10,000 to $20,000) must be paid. This adds to the legal, discharge, and appraisal costs, bringing total expenses to around $12,000 to $25,000. However, if the interest savings over the new term outweigh these costs, refinancing with a new lender can be a smart move.

The key advantage of switching lenders is securing the best possible rate and loan terms. Some lenders may also offer cash-back incentives to offset costs. The downside is the significant upfront expense, which means borrowers must carefully calculate their break-even point to ensure the switch makes financial sense.

Which Strategy is Best?

Choosing the right refinancing strategy depends on the borrower’s financial goals, the size of potential penalties, and the interest rate environment. Staying with the current lender is cost-effective and simple but may not yield the best rates. A blend and extend can reduce penalties while allowing access to equity, but it may not always offer the lowest possible rate. Switching to a new lender can provide long-term savings but comes with high upfront costs.

Before making a decision, talk to me and let’s compare options and assess the true cost-benefit of each refinancing path. By understanding the full scope of refinancing costs, borrowers can make informed decisions that align with their financial objectives.