Refinancing your mortgage refers to the replacement of an existing debt obligation with a debt obligation under different terms. The most common consumer refinancing is for a home mortgage.

If the replacement of debt occurs under financial distress, it is also referred to as debt restructuring.

A loan (debt) can be refinanced for various reasons:

• to take advantage of a better interest rate (which will result in either a reduced monthly payment or a reduced term)
• to consolidate other debt(s) into one loan(this will result in a longer term)
• to reduce the monthly repayment amount (this will result in a longer term)
• to reduce or alter risk (e.g. changing from a variable-rate to a fixed-rate loan)
• to free up cash (this will result in a longer term)

Breaking your mortgage contract to renew at a new rate and a new term, may include a prepayment charge to reimburse your financial institution for the lost interest income. As a rule, the prepayment charge is based on three months interest or the interest rate differential (the difference between your current mortgage rate for the balance of your term and the new rate you want to refinance at), whichever is greater.

This amount will tell you if you should refinance the mortgage. The shorter the remaining term – less than a year is best – the smaller the penalty. The longer the term left on your mortgage, the greater the prepayment penalties. I am able to calculate your information to determine if you should break your mortgage and take advantage of current lower rates.

Mortgages insured by the Canadian Mortgage and Housing Corporation, has a maximum penalty of three months interest after the third anniversary date of the interest adjustment period, or after the third anniversary date from your most recent renewal.