Refinancing to Switch Mortgage Products in Canada

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Changing Your Mortgage Product Through Refinancing

The Canadian mortgage market offers a variety of products: fixed rate, variable rate, hybrid rate, conventional mortgage, collateral mortgage, open or closed term. The initial choice is not always the best fit as circumstances change. Refinancing allows you to switch mortgage products mid-term, but this transaction involves costs that must be carefully evaluated against the expected benefits.

Switching From Variable to Fixed Rate

The variable-to-fixed switch is the most frequent conversion, especially during periods of interest rate increases by the Bank of Canada. The borrower seeks the security of stable, predictable payments. The good news is that the variable-rate break penalty is almost always limited to three months' interest, making it generally affordable. However, you have two options: internal conversion with your current lender (often free but at the posted rate, which is less competitive) or refinancing with a new lender (3-month penalty plus fees, but potentially a better rate).

Switching From Fixed to Variable Rate

This conversion is financially more complex because the fixed-rate break penalty can be calculated using the interest rate differential (IRD), a potentially substantial amount. Ironically, it is often when rates drop (making variable rates attractive) that the IRD is highest, as the gap between your contractual rate and the lender's current rate widens. A break-even calculation is essential before proceeding.

Collateral vs Conventional Mortgage

Collateral mortgage: A type of mortgage registered for an amount exceeding the actual loan, generally as a collateral obligation in Quebec. It allows the lender to increase available credit without returning to the notary, but it cannot be assigned (transferred) to another lender at renewal. Switching lenders requires discharging the collateral mortgage and registering a new one, with associated legal fees.

If you have a collateral mortgage with one of the major banks and want the flexibility to switch lenders at renewal without fees, refinancing to a conventional mortgage can be strategic. Monoline lenders such as First National, MCAP, and Merix Financial generally offer conventional mortgages that can be transferred (assigned) to another lender at renewal without significant legal fees. This portability is an important advantage for borrowers who want to shop for their rate at each renewal.

Product Change Costs in Quebec

Break penalty: 3 months' interest (variable) or the greater of 3 months and the IRD (fixed). The amount varies considerably depending on the rate type and remaining term duration.
Notary fees: the CCQ requires a notarial deed for any new immovable hypothec in Quebec. Budget $1,000 to $2,000.
Discharge fees: necessary if switching lenders, especially to cancel a collateral mortgage. Expect $400 to $800.
Property appraisal: often required by the new lender, costing $300 to $500.
OSFI stress test: it is necessary to requalify at the contractual rate + 2% or 5.25% (whichever is higher), which may limit your options if your income or debt levels have changed.

The Alternative: Waiting for Renewal

In many cases, the most cost-effective strategy is to wait for the term to expire before changing products. At renewal, no penalty applies and you have full latitude to change rate type, term length, and even lender. Your AMF-certified mortgage broker can begin preparing your file 120 days before maturity to secure the best available rates. If your current mortgage is conventional, the transfer to a new lender can be done by simple assignment, without major notary fees. Under the LDPSF, your broker must inform you of all available options and help you déterminé whether immédiate refinancing or waiting for renewal is the optimal strategy for your situation.

Frequently Asked Questions

What is the difference between a collateral and conventional mortgage?

A conventional mortgage is registered for the exact loan amount and can be transferred to another lender at renewal without legal fees (assignment). A collateral mortgage is registered for an amount exceeding the loan (often 125% of the value) as a collateral charge. It cannot be assigned to another lender without discharge and a new contract, resulting in notary fees. Major banks like TD and RBC primarily use collateral mortgages.

How much does it cost to convert from variable to fixed rate with the same lender?

Most lenders offer a free conversion option from variable to fixed, but the fixed rate offered is generally the current posted rate for the chosen term, not a preferred rate. It is often more advantageous to shop other lenders through your AMF-certified broker, factoring in the 3 months' interest penalty to break the variable rate.

Is switching from fixed to variable beneficial when rates are dropping?

It depends on the fixed-rate break penalty. If the IRD is high (which often happens when rates drop), the penalty can cancel out expected savings. You need to calculate the break-even by comparing the penalty to projected savings on the new variable term. Your mortgage broker can perform this analysis.

Can I change products at renewal without fees?

Yes. At term renewal, you can change rate type (fixed, variable, hybrid) and even switch lenders without a prepayment penalty. This is the ideal time to review your mortgage strategy. If you switch lenders with a conventional mortgage, the transfer can be done without significant legal fees.

Which Quebec lenders offer conventional mortgages?

Monoline lenders (First National, MCAP, Merix Financial) and some alternative lenders generally offer conventional mortgages. Desjardins also offers conventional mortgages in certain cases. Major banks (TD, RBC, BMO) primarily use collateral charges. Your AMF-certified broker can guide you to the mortgage type best suited to your needs.