Refinancing a Property in Ontario: A Step-by-Step Guide

Refinancing allows a property owner to replace an existing mortgage, increase the amount borrowed against the property or change the terms of a current loan. It may be used to obtain a better interest rate, consolidate debt, finance renovations, fund a business or access equity for another purpose.

Although refinancing does not involve buying or selling the property, it is still a legal real estate transaction. The new lender must be satisfied with the borrower, the property and the state of title before advancing funds.

This guide explains the main steps involved in refinancing a property in Ontario.

Step 1: Identify the Purpose of the Refinance

Before applying, consider what you want the refinancing to accomplish. A clear objective will help you compare the available products and understand whether the transaction makes financial sense.

Common reasons for refinancing include:

• Replacing a mortgage with one that has a lower interest rate
• Changing from a variable-rate mortgage to a fixed-rate mortgage
• Extending or shortening the amortization period
• Consolidating higher-interest debts
• Financing renovations or major expenses
• Accessing equity for an investment or business
• Removing or adding a borrower, where the lender approves
• Replacing private financing with conventional financing

A lower monthly payment does not necessarily mean a lower overall cost. Extending the amortization period may reduce the monthly payment while increasing the total interest paid over the life of the loan.

It is also important to ask whether the existing mortgage can be renewed, blended or otherwise amended without a full refinance.

Step 2: Review the Existing Mortgage

The terms of the current mortgage can significantly affect the cost of refinancing. Contact the existing lender and request information about the amount required to pay out the loan.

Potential costs include:

• A prepayment penalty
• Accrued interest
• A mortgage discharge fee
• Administrative charges
• Appraisal fees
• Legal fees and disbursements
• Title insurance
• Registration fees
• Broker or lender fees

Prepayment penalties can be substantial, particularly with a closed fixed-rate mortgage. Depending on the mortgage terms, the penalty may be based on several months of interest or an interest-rate-differential calculation.

A payout estimate obtained early in the process may change by the closing date. The lawyer completing the refinance will normally request an official payout statement showing the amount required on the expected closing date.

Step 3: Apply for the New Mortgage

A borrower may apply directly to a bank, credit union or other lender, or work with a mortgage broker. The lender will assess the borrower’s income, credit, debts and the value of the property.

The lender may request:

• Proof of employment and income
• Recent tax returns or notices of assessment
• Bank and investment statements
• Information about existing debts
• The current mortgage statement
• A municipal property tax bill
• Condominium documents, where applicable
• Proof of property insurance
• An appraisal of the property
• Corporate financial information, if the borrower is a corporation

Approval may be subject to conditions. For example, the lender may require certain debts to be paid from the mortgage proceeds, an existing line of credit to be closed or a title issue to be resolved before funds are advanced.

A pre-approval or verbal discussion is not the same as a final mortgage commitment. Borrowers should review the written commitment carefully and make sure they understand the interest rate, term, payment schedule, prepayment privileges, fees and conditions.

Step 4: Retain a Real Estate Lawyer

Most institutional lenders require a lawyer to complete the legal aspects of the refinance. In many transactions, the lawyer acts for both the borrower and the lender, subject to professional rules and the absence of a disqualifying conflict.

The lender sends mortgage instructions to the lawyer. These instructions set out the lender’s conditions for advancing the funds and the documents that must be signed and registered.

The borrower should give the lawyer:

• Two pieces of acceptable identification, as requested
• The lender’s or mortgage broker’s contact information
• A copy of the mortgage commitment
• A recent property tax bill
• The current lender’s mortgage information
• Details of any secured line of credit
• Proof of property insurance
• Condominium information, if applicable
• A void cheque or verified banking information
• Information about judgments, liens or other claims
• Any separation agreement, court order or power of attorney that may affect the transaction

Providing complete information early gives the lawyer time to identify issues that could delay closing.

Step 5: Review Ownership and Spousal Rights

The lawyer will confirm who owns the property and whether all required parties are involved in the refinancing.

The names on the mortgage commitment should be consistent with the registered ownership. If an owner is to be added to or removed from title, the transaction involves more than a straightforward refinance. The lender must approve the ownership change, and there may be land transfer tax, income tax, family law or estate-planning consequences.

Spousal rights must also be considered. Under Ontario’s Family Law Act, a married owner generally cannot mortgage or otherwise encumber a matrimonial home without the consent of the other spouse, unless a statutory exception applies. A spouse who is not registered on title may therefore still need to sign documents.

Tell the lawyer as early as possible if:

• You are married and your spouse is not on title
• You are separated
• The property may be a matrimonial home
• An owner has died
• Someone will sign under a power of attorney
• The property is owned by a corporation, estate or trust
• The registered name of an owner has changed

These circumstances do not necessarily prevent refinancing, but they can require additional documents and legal analysis.

Step 6: Complete the Title Search

The lawyer searches the parcel register to confirm ownership and identify registered interests affecting the property.

The search may reveal:

• Existing mortgages or secured lines of credit
• Construction liens
• Writs of seizure and sale
• Easements and rights of way
• Restrictive covenants
• Notices registered against title
• Tax arrears
• Agreements affecting the property
• Errors in an owner’s name or the legal description

The new lender will usually require its mortgage to have a particular priority on title. An existing mortgage may need to be discharged, while another lender may need to postpone its interest.

A secured home equity line of credit can affect the refinance even if its balance is zero. If it is registered on title, the new lender may require it to be closed and discharged.

Step 7: Satisfy the Lender’s Conditions

The lawyer works with the borrower, lender and any mortgage broker to satisfy the legal conditions in the mortgage instructions.

These conditions commonly include:

• Confirming the borrower’s identity
• Verifying ownership and marital status
• Completing the title search
• Obtaining proof of property insurance
• Confirming that property taxes are current
• Arranging title insurance
• Preparing the new mortgage
• Obtaining payout statements for existing secured debts
• Securing directions for the use of the loan proceeds
• Confirming that no material information has changed

The lender may also require an independent appraisal, proof that a renovation has been completed or confirmation that the property is owner-occupied.

Borrowers should not assume that funds are guaranteed simply because mortgage instructions have been sent to the lawyer. The lender may still refuse or delay funding if a condition remains outstanding or the borrower’s circumstances change before closing.

Step 8: Review and Sign the Mortgage Documents

Before closing, the borrower meets with the lawyer to review and sign the required documents. Depending on the lender and the circumstances, the meeting may take place in person or through an approved remote-signing process.

The documents may include:

• The charge or mortgage to be registered on title
• The lender’s standard-form mortgage terms
• A direction concerning the payment of funds
• A statutory declaration about possession and marital status
• An acknowledgment of the lender’s disclosure documents
• Authorizations to pay existing mortgages and debts
• Title insurance documents
• The lawyer’s retainer and reporting documents

A mortgage is a significant legal commitment. The borrower should understand the principal amount, interest provisions, payment obligations, default terms and prepayment rights before signing.

Some registered mortgages secure more than the amount initially advanced. For example, a collateral charge may be registered for an amount equal to or greater than the approved credit limit. Borrowers should ask questions if the registered amount differs from the funds they expect to receive.

Step 9: Closing the Refinance

On the closing date, the lender sends the mortgage funds to the lawyer, provided all funding conditions have been satisfied.

The lawyer then registers the new mortgage through Ontario’s electronic land registration system. The funds are applied according to the lender’s instructions and the borrower’s signed direction.

Payments may include:

• The payout of the existing mortgage
• The payout and closure of secured credit facilities
• Debts that the lender requires to be paid
• Property tax arrears
• Legal fees and disbursements
• Title insurance and registration charges
• Broker or lender fees
• Other authorized amounts

The balance, if any, is released to the borrower through an agreed and verified payment method.

If the new lender requires first priority, the existing mortgage must be dealt with as part of the closing. The former lender may register its discharge after receiving payment. The lawyer will generally follow up to ensure that the discharged mortgage is removed from title.

Step 10: Review the Final Report

After closing, the lawyer provides a report summarizing the transaction. It will usually include a trust statement showing the mortgage funds received and each payment made.

The report may also include:

• A copy of the registered mortgage
• Confirmation of title insurance
• The lender’s payout statement
• Copies of signed documents
• Confirmation that the old mortgage has been or will be discharged

Review the statement carefully and keep the documents with your property records. Contact the lawyer if a payment or deduction is unclear.

Does Refinancing Trigger Land Transfer Tax?

A straightforward refinance that does not change ownership will not normally trigger Ontario land transfer tax. The registration of a mortgage alone is not a transfer of title.

Land transfer tax may become relevant if the refinancing also involves adding or removing an owner, transferring an interest in the property or having another person assume mortgage debt. The tax consequences depend on the structure of the transaction and any available exemption.

Ownership changes can also have income tax, family law and estate-planning consequences. Legal and tax advice should be obtained before proceeding.

Consider the Use of the Borrowed Funds

The purpose for which refinancing proceeds are used may have tax and legal implications. Interest is not automatically tax-deductible simply because the loan is secured against real estate. Deductibility generally depends on how the borrowed money is used and whether the applicable tax requirements are met.

Where funds will be invested, advanced to a business or used to acquire another property, an accountant or tax adviser should be consulted. Clear records showing how the funds were used should be maintained.

Protect Yourself From Mortgage Fraud

Refinancing transactions can be targeted by identity theft, title fraud and payment-direction fraud.

Borrowers should:

• Confirm requests for information through trusted contact details
• Avoid sending sensitive documents through unsecured channels
• Review all payment directions carefully
• Question unexpected changes to banking instructions
• Never sign blank or incomplete documents
• Tell the lawyer if someone is pressuring them to complete the transaction
• Ensure that the purpose and destination of the loan proceeds are accurately disclosed

If instructions change close to the funding date, contact the lawyer or lender directly using a telephone number you have independently verified.

Preparing for a Smooth Refinance

A refinancing transaction is usually straightforward when the lender’s conditions are clear and title issues are identified early. Delays often arise from missing mortgage instructions, unexpected penalties, undischarged mortgages, property tax arrears or differences between the borrowers approved by the lender and the owners shown on title.

DJC Law can assist with the legal aspects of refinancing a residential or commercial property in Ontario, including reviewing title, preparing and registering the new mortgage, paying out existing secured debts and accounting for the loan proceeds.

Obtaining legal advice early can help you understand the transaction, anticipate its costs and avoid problems on the closing date.

This article provides general information only and does not constitute legal, tax or financial advice. Refinancing requirements vary depending on the lender, the property and the borrower’s circumstances. Speak with qualified professional advisers before proceeding.