For Canadian homeowners on their first mortgage, the term ‘mortgage refinancing’ might be a commonly heard one, and it refers to homeowners securing another loan to pay off their original mortgage.

By securing a second mortgage with a different loan term (ideally a better one), and from the same lender or a different one, you can get a loan for as much as 80% of the original value of your property when purchased.

Sound complicated? Well, it doesn’t have to be, but it is important to watch out for risks, and while there are plenty of benefits attached to mortgage refinancing, there are some risks, too:

Nothing comes for free

There is no such thing as free refinancing, and while refinancing your mortgage might still be a good idea in the long term, it’s important to note that you will likely be required to pay a pre-payment penalty, which is typically the equivalent of 3 months of interest charges.

Watch out when considering refinancing your mortgage, or you could end up paying more in penalties than the amount you’ll save from the lower interest rate. 

You could end up in greater debt

While you can pay off your high-interest debt by refinancing (sometimes referred to as ‘debt consolidation’), there is a catch involved. When you pay off your high-interest credit card debt and car loans with a refinancing plan, you’re transferring your unsecured debt into your mortgage plan, which is backed by your home. Should you default on your payment at any time, you could stand to lose your home, as it would be classed as collateral.

Not paying your credit card debt may be limited to giving you a bad credit score, but when you miss a mortgage payment, it can be as serious as foreclosure.

Longer durations

The majority of mortgage plans last for 30 years, and when you refinance, you merge the old mortgage into the new 30 year plan. If you don’t have many years left on your old mortgage and you refinance for a new 30-year-plan, you could end up paying higher interest rates overall – not a good strategy for saving money.

Also, for homeowners who don’t plan to remain in their home long term, getting a longer mortgage term and having to break it early could cost you dearly.

As with any decision you make related to your finances, it always pays to seek professional advice and guidance, and you may find that an experienced mortgage broker can assist you and help you better understand the consequences of refinancing your mortgage.