The Downsides of Refinancing and What Can Disqualify You

By Connie Graham and Briana Hennigan |

Best Mortgage Broker Edmonton

I've written before about how refinancing can help, especially when it comes to consolidating high-interest debt. It can be a very good tool. But I'd be doing you a disservice if I only told you that half of the story.

So here's the other half: what refinancing really costs, when it isn't the right move, and what can stop one from being approved.

First, how much can you access?

In Canada, you can generally refinance up to 80% of your home's appraised value.

Example: Your home appraises at $500,000. 80% of that is $400,000. If you owe $300,000, you could potentially access up to $100,000, before costs.

The real costs

1. Penalties for breaking your current mortgage. If you refinance mid-term, you'll usually pay a penalty. For a variable mortgage that's often three months' interest. For a fixed mortgage it's typically the greater of three months' interest or an interest rate differential (IRD), which can be much higher.

Example: Three months' interest on a $300,000 balance at 4.5% is about $3,375. An IRD penalty could be several times that, depending on your lender and rate.

2. Legal and appraisal costs. A refinance is a new mortgage registration, so there are typically legal fees and an appraisal. Some lenders offer help with these costs; many don't.

3. Resetting the clock. This is the one people underestimate. Refinancing often means stretching your mortgage back out to 25 or 30 years. That lowers the payment, but it adds interest over time.

Example: Say you owe $300,000 with 18 years left, paying about $2,022/month at 4.5%. You refinance to $400,000:

  • Over 18 years: about $2,697/month and about $182,000 in total interest
  • Over 25 years: about $2,214/month and about $264,000 in total interest

The 25-year option is easier on your monthly budget, but it costs about $82,000 more in interest over time. Sometimes that trade-off is worth it. It just shouldn't happen by accident.

When refinancing may not be the right move

  • The penalty eats most of the benefit. If you're close to renewal, waiting may cost far less.
  • The spending habits haven't changed. Consolidating debt only helps if the credit cards stay paid off. Otherwise you can end up with a bigger mortgage and new balances. I say this with care, because it happens more often than people expect.
  • You're borrowing for something short-lived. Spreading a vacation or a vehicle over 25 years of mortgage interest rarely makes sense.
  • A HELOC or second mortgage would work better. Sometimes accessing equity without breaking your first mortgage is cheaper.

What can disqualify you

A refinance is a new approval, so the lender looks at your whole picture again:

  • Not enough equity. If your balance is already near 80% of the home's value, there may be little or nothing to access.
  • Income that doesn't qualify. You'll need to pass the stress test on the new, larger mortgage. A change in employment, reduced hours, or new self-employment can make that harder.
  • Credit issues. Missed payments, collections, or very high credit card use can limit your options with mainstream lenders.
  • Total debt levels. Even after consolidation, your overall debt ratios need to fit lender limits.
  • The property itself. Some property types, conditions, or locations are harder to finance.
  • Tax arrears. Unpaid property or income taxes usually need to be dealt with.

Not qualifying with a mainstream lender doesn't always mean "no." Alternative lenders exist, but they come with higher costs. That's a decision to make with clear eyes and full disclosure.

The takeaway

Refinancing works best when it's part of a plan: lower overall costs, a clear payoff timeline, and a real change in how the household runs its money. It works worst when it's just a way to make this month's pressure go away.

Your next step

If you're considering a refinance, bring me your current mortgage statement and a list of the debts you're thinking about consolidating. We'll run the real numbers, penalty included, and I'll tell you honestly whether it's worth doing now, later, or at all.

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