Mortgage Renewal vs Refinance: Which To Choose?
As a homeowner, you may want to make changes to your mortgage at times. Depending on where you are in your term, this typically means choosing between a mortgage renewal or a refinance. Many Canadians face this decision as mortgage rates and payments change over time, especially at renewal, when new rates can significantly affect monthly costs.
A mortgage renewal in Canada occurs at the end of your mortgage term. Meanwhile, a mortgage refinance can occur at any time. This post will explain the key difference between a mortgage renewal and refinance, and when you may want to choose one over the other.
Key Takeaways
- Renewals involve signing an updated contract with a new rate and term adjusted to reflect the current market.
- Refinances involve breaking your current mortgage contract to make significant changes to your mortgage.
- The decision to renew or refinance will depend on where you are in your current mortgage term.
Mortgage Renewal vs Mortgage Refinance: What’s the Difference?
A mortgage renewal is when you renew your mortgage agreement at the end of your term. A renewal simply extends your existing mortgage into a new term so you can continue to pay down your loan until the end of its amortization. With a renewal, you’ll continue with your current amortization schedule. You and your lender will agree on new terms for your mortgage, including a new interest rate and term.
A mortgage refinance is when you break your current mortgage contract and sign a new one. With a refinance, you are making significant changes to your mortgage, which could include extending your amortization, adding or removing someone from the title, or increasing the mortgage amount. A refinance allows you to secure a lower mortgage interest rate if rates have fallen significantly before the end of your term or use your home equity to complete renovations, debt consolidation or investing.
Should You Refinance or Renew Your Mortgage in Canada?
Choosing between refinancing and renewing your mortgage depends on your goals. A mortgage renewal happens at the end of your mortgage term and keeps your existing loan balance and amortization. A renewal is simply replacing your interest rate and term length with a new one. A refinance replaces your mortgage entirely and allows you to make changes to your loan amount, amortization, or change of covenant.
When Renewing Your Mortgage Makes More Sense
Renewing is the simpler option and may make the most sense when you’re at the end of your existing mortgage term. If you’ve reached the end of your current term and do not need to access equity or restructure your loan in any way, renewing allows you to continue your mortgage with your existing lender or switch to a new one.
When Refinancing Your Mortgage Makes More Sense
Refinancing offers more flexibility to modify your existing mortgage. If you’re in the middle of your mortgage term or need to make significant changes to your mortgage, then a refinance may make the most sense. With a refinance, you can access the equity in your home, extend your amortization, or secure a lower interest rate at any time. However, a refinance requires a full application and requalification, and often comes with additional fees such as legal costs and prepayment penalties.
A Simple Way to Decide
- If you want to lower payments, access equity, or restructure your mortgage, refinancing is usually the better option.
- If you want to avoid prepayment penalties, keep things simple, and secure a new rate at the end of the term, renewal is usually the better choice.
- If you are unsure, comparing the two scenarios side by side with real numbers is the most effective way to make the right decision.
Should You Renew or Refinance Your Mortgage: A Comparison
The right decision about whether to renew or refinance ultimately depends on where you are in your mortgage term, your financial situation, future plans, and current market conditions.
| Renewal | Refinance | |
|---|---|---|
| Timing | Takes place at the end of your mortgage term. | Can be done at any time during the term. |
| Purpose | Extension of your existing mortgage contract. | Breaking your existing mortgage contract for a new one. |
| Best For | Renegotiate your interest rate, term and type of your existing mortgage. | Access home equity, extend amortization, or secure a lower interest rate on a new mortgage. |
| Requirements | Renew with your current lender or switch to a new lender. Early renew with your current lender to convert your variable rate to a fixed rate, typically without a penalty. | Refinance with your current lender or shop around for a new lender. |
| Pros | No fees to renew (unless switching to a new lender). Allows you to switch lenders without stress testing. | Ability to renegotiate every aspect of your contract. Lower mortgage payments through longer amortization or lower interest rates. Consolidating higher interest unsecured debts into a single manageable payment. |
| Cons | Possible fees if switching lenders. | Legal and appraisal fees may apply for the new mortgage. Discharge fees and penalties may apply to your existing lender. The new mortgage must be stress tested. |
Renewing With Your Lender vs Finding a New Lender
If you are happy with your current lender and what they have offered you, then renewing with them is as easy as signing and returning the renewal offer. If you believe you can get a better rate, you can negotiate with your lender to see if they will match the rates other lenders offer.
Shopping around for a new lender will guarantee you find the best rates and features available. This can either be to secure a lower interest rate or better terms and conditions to better align with your current financial situation. If you decide to renew with a new lender, you must go through the application process again, as you did when you first obtained a mortgage.
You must meet all of the new lenders’ qualifying criteria, which may include a credit check, and provide all required documentation, such as T4s, pay stubs, and possibly your notice of assessment (NOA). There may be additional costs to transfer the mortgage through a notary or to have the home appraised.
Getting a Better Mortgage Rate On Your Renewal by Switching
When it comes to renewing your mortgage, it’s important that you carefully review your options and shop around for the best deal. Switching lenders could save you thousands of dollars in interest-carrying costs. Don’t be afraid to negotiate and ask for a lower mortgage rate.
You should never accept the first rate you’re offered unless you work with a transparent lender like nesto. Take the time to research and understand the market to find the best mortgage option available with the right features for your financial circumstances.
When to Refinance Your Mortgage
If you’re in the middle of your mortgage term or need to make significant changes to your mortgage, then you will need to refinance. With a refinance, you can access the equity in your home, extend your amortization, or secure a lower interest rate at any time. Refinancing is typically limited to 80% of your home’s value, based on federal mortgage lending guidelines.
Access Equity in Your Home
Refinancing can be a smart financial move for homeowners who want to access home equity. You can build equity in 2 ways: either as you pay down your mortgage or as your property increases in value. Refinancing increases your mortgage amount, allowing you to borrow against your home. Refinancing your mortgage allows you to borrow up to 80% of your home’s value and use those funds for anything you choose.
Lower Your Mortgage Payment
Since refinancing allows you to negotiate a brand new mortgage, almost all aspects of the loan can be tailored to better fit your current needs. Refinancing opens up opportunities to secure a lower interest rate or extend your amortization, helping you reduce your monthly payments.
Consolidate Your Debt
If you carry high-interest debts, a refinance can help you consolidate your debts by using the equity in your home to pay them off. These debts can include credit cards, loans, and lines of credit with interest rates higher than your mortgage. Refinancing can reduce your monthly payments, helping you pay off your debts faster while saving you money in interest-carrying costs.
Save Money on Interest-Carrying Costs
If interest rates have fallen significantly since you first obtained your mortgage, a refinance can help you secure a much lower interest rate that can save you money. It’s important to compare the costs of breaking your current mortgage term to understand your potential savings and ensure they outweigh any fees.
Using a Calculator to Compare Your Renewal vs Refinance Options
Comparing your options when deciding whether to renew or refinance can be easier with mortgage renewal and refinance calculators. These tools can help you visualize each option’s potential costs and savings.
By entering your current mortgage details and the proposed new terms for a renewal or refinance, you can see a breakdown of your mortgage in each scenario, including mortgage payments and the total cost of principal and interest over the term.
Frequently Asked Questions for Renewals and Refinances
When should I renew my mortgage?
You will renew your mortgage at the end of each mortgage term. However, if your personal circumstances or financial situation have changed significantly since your last term began, and you need to change your mortgage beyond obtaining a new interest rate, a refinance may be more beneficial.
When should I refinance my mortgage?
You could refinance your mortgage if you have equity in your home that you wish to access to lower your mortgage payments by extending the amortization or through a lower rate. A refinance could save you on interest-carrying costs if you secure a lower interest rate. It’s worth noting that increasing your amortization could increase your total cost of borrowing over the life of your mortgage.
How can I pay off my mortgage faster?
You can pay off your mortgage faster by renewing into a shorter amortization. This will increase your mortgage payments, helping you pay down your mortgage faster while saving you money on interest.
Other ways to become mortgage-free faster include making a lump sum payment toward your principal or increasing your mortgage payments within your annual prepayment limits. You will need to check the prepayment privileges your lender offers to ensure you do not exceed any limits; otherwise, you could be charged a prepayment penalty.
Final Thoughts
Choosing between a mortgage renewal and refinance largely depends on your individual circumstances, finances, financial goals, and where you are in your mortgage term. While renewal is a much simpler process if you stick with your current lender, switching to a new lender or refinancing could offer you the potential for better savings and flexibility.
Contact nesto mortgage experts if you need advice on evaluating your cost savings between renewal and refinance. We’ll provide you with tailored guidance for your unique financial situation.
Why Choose nesto
At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and the quality of their advice. nesto aims to transform the mortgage industry by providing honest advice and competitive rates through a 100% digital, transparent, and seamless process.
nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.
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