Refinancing Your Rental Property Mortgage
Key Takeaways
Refinancing rental properties in Canada can lower monthly payments, unlock equity, and improve cash flow, helping landlords grow their real estate portfolios strategically.
Successful refinancing requires careful evaluation of costs, risks, tax implications, and lender requirements, including credit, property value, and proof of rental income.
Partnering with a professional property management company like Sutton Group PM strengthens your refinancing position by maintaining steady rental income, property value, and accurate financial records.
Owning a rental property in Canada offers great long-term potential, but it also comes with its share of complexities.
From managing tenants and maintaining the property to navigating market shifts, successful ownership requires careful planning.
One of the most effective strategies for boosting profitability is refinancing your rental property mortgage. When done strategically, refinancing can lower your monthly costs, unlock built-up equity, and provide the financial flexibility to expand your real estate portfolio.
At Sutton Group Property Management, we help landlords make informed decisions that support both immediate cash flow and long-term growth. In this guide, we’ll explore how refinancing works, when it makes sense, and how to approach it to maximize your investment returns.
What Does Refinancing Mean?
Refinancing replaces your existing mortgage with a new one. The new loan may come with a different interest rate, payment schedule, or amortization period.
Many investors use refinancing to secure lower monthly payments, restructure debt, or access the equity that has built up as the property’s value increases.
For example, if you originally purchased a rental property with a 25-year mortgage at a higher interest rate, and interest rates have since dropped, refinancing could provide substantial savings.
Alternatively, you may want to leverage equity through a cash-out refinance to fund renovations, expand your portfolio, or cover other investments.
Why Consider Refinancing?
There are several reasons refinancing appeals to rental property owners:
Lower Interest Rates and Payments: When market rates fall, refinancing allows you to take advantage of reduced borrowing costs. This means lower monthly payments and improved cash flow.
Access to Equity: Over time, mortgage payments reduce your principal balance while market appreciation boosts your property’s value. Together, they build equity. Refinancing lets you borrow against this equity to fund renovations or buy new properties.
Restructuring Debt: Some landlords use refinancing to consolidate high-interest debts. For example, rolling credit card or personal loan balances into a mortgage can reduce interest expenses and simplify payments.
Improving Cash Flow: By extending the amortization period or lowering monthly payments, refinancing can free up more income to reinvest, save, or use as a buffer against unexpected costs.
Tax Benefits: In Canada, interest on money borrowed for income-producing purposes (such as rental property) is generally tax-deductible. Refinancing for qualified uses may allow you to deduct interest expenses, reducing your taxable rental income.
When Refinancing Is Not a Good Option
Although refinancing has many benefits, it isn’t always the right move. Costs and risks must be weighed carefully.
Prepayment Penalties: Many mortgages in Canada include penalties for breaking or refinancing before the term ends. Depending on the amount, these penalties can offset the financial gains.
Closing Costs: Refinancing involves expenses such as legal fees, appraisal fees, and registration charges. If the potential savings don’t outweigh these costs, refinancing could be counterproductive.
Extending Amortization: Lower monthly payments often come from spreading the loan over a longer period. While this helps cash flow, it may result in higher interest costs over the life of the mortgage.
Unfavorable Market Rates: Sometimes current refinance rates are not significantly lower than your existing rate. Refinancing at such times may not provide meaningful savings.
Tax Implications: Using refinanced funds for personal, non-income-producing purposes can remove your ability to deduct interest expenses. It’s important to understand how the funds will be used before refinancing.
Key Requirements in Canada
Lenders in Canada look at several factors before approving a refinance:
Loan-to-Value Ratio (LTV): Most lenders will allow refinancing up to about 80% of the property’s appraised value. For cash-out refinances, they may require even more equity.
Credit Score: A strong credit history increases the likelihood of approval and more favorable rates.
Debt Service Ratios: Lenders calculate ratios such as the Gross Debt Service (GDS) and Total Debt Service (TDS) to figure out whether your rental income and personal income can support your mortgage payments.
Proof of Rental Income: You’ll need to provide rent rolls, lease agreements, and past tax filings that show rental revenue.
Property Appraisal: A professional appraisal determines the property’s current market value. Renovations and upgrades can positively influence this assessment.
The Refinancing Process
Refinancing is a multi-step process. Here’s how most Canadian rental property owners move through it:
Set Your Goals. Decide whether you want to lower monthly payments, access equity, or shorten the repayment term. Clear goals help you choose the right refinance structure.
Review Your Current Mortgage. Understand your current rate, amortization, and potential penalties. This gives you a baseline for comparison.
Research Rates and Options. Compare multiple lenders and mortgage products. Mortgage brokers can also be helpful in identifying competitive terms.
Organize Documentation. Gather recent rental income statements, tax returns, proof of insurance, and property tax bills. Lenders want to see a clear financial picture.
Get an Appraisal. Expect a professional appraisal as part of the process. Documented improvements to your property can increase its appraised value.
Calculate Costs. Include all closing costs and penalties in your decision-making. Calculate whether the potential savings outweigh these expenses.
Submit Application. The lender will review your documents, verify income, and assess your overall financial health.
Finalize and Close. Once approved, you sign new documents, your old mortgage is paid out, and your new loan terms take effect.
Tax Considerations
The CRA allows you to deduct interest on loans used to earn rental income, including refinanced mortgages and related fees like appraisals or legal costs.
However, interest on funds used for personal expenses (e.g., paying off your own home) is not deductible. Consult a tax professional to structure your refinancing for maximum tax benefit and compliance.
Risks and Pitfalls
Refinancing can help, but it comes with risks:
Increased debt may limit flexibility.
Market downturns can reduce property value.
Focusing only on lower payments may increase long-term interest costs.
Plan carefully and use conservative projections to avoid these pitfalls.
How Property Management Supports Refinancing
Lenders assess both your finances and the property’s performance. Professional property management boosts your chances of favorable refinancing by:
Ensuring steady rental income through reliable tenants.
Providing accurate financial and maintenance records.
A well-managed property strengthens your refinancing position and overall investment performance.
Conclusion
Refinancing a rental property in Canada can lower costs, unlock equity, and fuel portfolio growth, but it requires careful planning.
Weigh the pros and cons, assess timing and tax impacts, and seek expert advice. For ongoing success and lender appeal, partnering with a trusted property manager like Sutton Group PM can help you maximize your investment.