Mortgage Basics

Mortgage Renewal vs Refinance: Which To Choose?

Mortgage Renewal vs Refinance: Which To Choose?

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    As a homeowner, there may be times when you want to make changes to your mortgage. Depending on where you are in your term, this typically means choosing between a mortgage renewal vs. a refinance. 

    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. You will sign a new contract with new rates and terms. 
    • The decision to renew or refinance will depend on where you are in your current mortgage term, the equity you have built, the current economic climate, and your financial situation and goals.

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    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, negotiating a new interest rate and term in the process. 

    A mortgage refinance happens when you break your current mortgage contract and sign a new one. With a refinance, you are making significant changes to your mortgage that could include extending your amortization, adding or removing someone from the title of the home 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. 

    What Happens When Your Mortgage Term Expires

    Mortgage terms are shorter than the amortization, typically ranging from 6 months to 10 years, while amortizations on most mortgages in Canada are set up for 25 or 30 years. This means you will have multiple terms that expire over the life of your mortgage. 

    When your term ends, lenders will send a renewal offer detailing the remaining balance of the loan and offer you interest rates for various terms. At this point, you must decide what to do with your mortgage: either pay off the remaining balance in full, renew for a new term with your current lender, switch to a new lender, or refinance.

    Should You Renew or Refinance Your Mortgage: A Comparison

    Deciding whether to renew or refinance will ultimately depend on where you are in your mortgage term, your financial situation, future plans, and current market conditions. 

    Renewal Refinance
    When? Takes place at the end of your mortgage term.  Can be done at any time during the term. 
    What? Extension of your existing mortgage contract. Breaking your existing mortgage contract for a new one.
    Why? 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.
    How? Renew with your current lender or switch to a new lender.

    Early renew with your current lender to convert variable to fixed, 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).

    Insured mortgages allow 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.

    Uninsured mortgages – must be stress tested if switching lenders.
    Legal and appraisal fees may apply for the new mortgage. 

    Discharge fees and penalties may apply to your existing lender.

    New mortgage must be stress tested. 

    Find a better rate, and we’ll match it, beat it, or give you $500*.

    *Conditions Apply

    With nesto, it’s stress-free

    When to Renew Your Mortgage

    If you’ve come to the end of your mortgage term, are happy, and don’t need to make significant changes, then renewing your mortgage may be the best option. You can continue with your current lender or switch to a new one when you renew. 

    Staying 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, similar to 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 documentation to qualify, 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 appraise the home. 

    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 a refinance may be the best option. With a refinance, you can access the equity in your home, extend your amortization, or secure a lower interest rate at any time. 

    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 access a lower interest rate or extend your amortization, which will help 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 to ensure the cost savings will be higher than 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 inputting your current mortgage details, along with the proposed new terms for either a renewal or refinance, you can see a breakdown of your mortgage with each scenario, including mortgage payments and the total cost of both principal and interest over the term. 

    What Rate Type Should You Choose If Rates Increase or Decrease?

    The decision between a fixed or variable rate depends largely on current market conditions, future expectations of the market, your finances and risk tolerance. 

    If interest rates are expected to rise, or you don’t have the risk appetite or finances to weather significant changes to your mortgage payments, it may be beneficial to lock into a fixed-rate mortgage. 

    If rates are expected to drop, or you have the risk appetite and finances to weather changes to your mortgage interest, a variable-rate mortgage (VRM) could save you money over your term. However, if you would rather see savings on your cash flow, consider an adjustable-rate mortgage (ARM) to keep more money over your term and reduce your mortgage payment with each rate cut.

    Frequently Asked Questions for Renewals and Refinances

    Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

    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 has 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 in 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 or 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 our mortgage experts if you need advice evaluating your cost savings between renewal and refinance. Our experts provide tailored guidance for your unique situation and can help you decide which option offers more benefits for your financial situation.

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