By Sandra MacGregor on October 19, 2023
Estimated reading time: 5 minutes

Mortgage refinance calculator

By Sandra MacGregor on October 19, 2023
Estimated reading time: 5 minutes

Use a mortgage refinance calculator to understand the costs and potential savings of breaking and renegotiating your mortgage agreement.

Depending on your circumstances, refinancing your mortgage can be a smart financial choice. However, while refinancing can lead to substantial savings, it can also come with steep costs. That’s when a mortgage refinance calculator can come in. It gives you a quick breakdown of the financial pros and cons of refinancing, which should make it easier for you to decided on the best course of action.

What is a mortgage refinance?

To refinance your mortgage means to break your current mortgage contract and negotiate a new one, either with the same lender or a new one. When you refinance your mortgage, you are taking out a new mortgage loan under different terms and paying off your existing one. Sometimes it makes financial sense to refinance a mortgage, but note that doing this before your mortgage is up for renewal can result in prepayment penalty fees. Whether or not to refinance a mortgage is a question many borrowers face at some point. A mortgage refinance calculator can help you decide.

How to use a mortgage refinance calculator

A mortgage refinance can save you money, but it can also come at a significant cost. To help you weigh these pros and cons, the Ratehub mortgage refinance calculator above estimates the fees involved in breaking your mortgage agreement and calculates what your new mortgage payment would be under revised terms. (MoneySense.ca and Ratehub.ca are both owned by Ratehub Inc.)

Based on the information you enter, it provides four pieces of information useful to home owners considering a refinance. For each scenario (sticking with your current contract and signing a new one), it shows you: the total mortgage amount, the amount of equity you can access, the penalty paid for breaking the mortgage, and the monthly mortgage payment (based on the interest rate you select).

Of course, every person’s situation is unique. Though a mortgage refinance calculator is a helpful tool, it’s always good to speak to an expert or mortgage broker, who can discuss all the specifics of your financial situation, before making a final decision.

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When should you refinance your mortgage?

There are few reasons you may want to break your current mortgage contract and refinance.

Taking advantage of lower interest rates. Negotiating a lower interest rate can reduce your regular mortgage payment, thus making your mortgage more affordable. It can also save you tens of thousands of dollars over the course of your mortgage. However, any savings that come from lower mortgage payments must be weighed against the cost of prepayment penalties, which can easily add up to thousands of dollars (more on that below).
Accessing the equity in your home. As you make payments on your mortgage, you steadily build up equity in your property. Your home equity is the difference between the current market value of your property and how much you still owe on your mortgage. Once you’ve built up sufficient equity, you may be able to borrow up to 80% of the appraised value of your home, minus the remaining balance on your mortgage. You can put this money towards home renovations, investment opportunities or even your children’s education.

You may also be able to get a home equity line of credit (HELOC), a secured form a credit. With a HELOC, you can access 65% to 80% of your home’s appraised value. Rather than having to break your mortgage and receiving the equity in a lump sum, you can use a HELOC to access the money as needed (the same way other lines of credit work). You only borrow and pay interest on the funds you need.

Finally, you may want to refinance your mortgage to consolidate debt. By taking out a mortgage that is bigger than your current one, you can put the extra cash towards paying off higher-interest debt, such as credit card debt, helping yourself save money in the long run.

Be aware of prepayment penalties

Just as there are good reasons to refinance a mortgage, there may be reasons to stick with your current one. A common reason people decide not to refinance is the high cost of prepayment penalties, which lenders charge when you break a mortgage contract early.

Fixed-rate mortgage holders typically pay the higher of three months’ interest on their remaining mortgage balance or the interest rate differential (IRD), a penalty based on the difference between your current mortgage rate and the rate the lender would use if lending the funds today. Variable-rate mortgage holders are penalized three months’ interest. (Note: Penalties may vary based on the financial institution, original mortgage contract, term length and more.)

It’s important to get a full picture of what refinancing your mortgage will cost you, which means factoring in not only the prepayment penalties, but also the legal, appraisal and administration fees, and the title search and insurance fees.

How to find the best mortgage rates when refinancing

Before signing a mortgage contract, you should compare rates from various lenders—the same goes for refinancing your mortgage. Speaking to a mortgage broker and doing your own research through an online comparison site are good places to start. The most common mortgage term length in Canada is five years. See the best five-year fixed rates and five-year variable rates available today.

Bottom line

Before deciding to refinance your mortgage, consider if the potential savings outweigh the financial penalties. A mortgage refinance calculator can be an indispensable tool. However, you should also consider your reasons for wanting to refinance and how the strategy will influence your other financial goals.

More on mortgage calculators:

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