Mortgage Basics

What is a Remortgage Loan? How a Remortgage Works in Canada

What is a Remortgage Loan? How a Remortgage Works in Canada
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  • nesto
| Feb 17, 2022
Reviewed, Jun 5, 2023

Table of contents

    Let’s talk about remortgaging in Canada. 

    Remortgaging is a situation where you opt to process another mortgage for your home, usually after paying off the previous loan to some extent. This is tied to a remortgage loan which simply refers to the process of getting a new mortgage loan to replace the present one. In other words, while the other is still in existence, you can work on getting a new loan to remortgage the house nonetheless. The new loan covers what is left of the previous mortgage and becomes the sole mortgage on the house. 

    This article details everything you need to know about remortgages, and remortgage requirements. Read on, and get remortgage smart today.

    Key Takeaways

    • A remortgage is not a second mortgage that coexists with the first. It pays off the first and becomes the sole mortgage
    • Remortgage and refinance refer to the same concept; they can be used interchangeably
    • To qualify for a remortgage, you would need to satisfy all the terms of the lender, just like a regular mortgage
    • A prepayment penalty may apply if you’re breaking your mortgage before the term ends

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    How Does a Remortgage Work in Canada?

    A remortgage in Canada is similar to how it works in other parts of the world. 

    The base working principle is that the remortgage loan or second mortgage loan pays off what is left of your initial mortgage, and depending on the type of remortgaging you opt for, you may get to keep whatever equity is remaining. 

    This differs from taking out just a second mortgage since, for a remortgage, the outstanding balance on the previous loan is offset before the new loan takes effect. Second mortgages, on the other hand, are secured, with the primary mortgage still remaining. 

    Can I get a remortgage loan? This would depend on whether you meet the lender’s requirements. 

    Remortgage vs. Refinance: What’s the Difference?

    A remortgage and a refinance both describe the same concept of using a new loan to pay off the present mortgage. 

    The only difference is that while ‘refinancing’ is the term used in Canada and the United Kingdom, ‘remortgaging’ is commonly used in the United States. 

    Despite geographical specificity, they can be used interchangeably at any point in relation to a mortgage. Requirements are similar for the various countries as well.

    Common Reasons to Take Out a Remortgage

    Before deciding to break your mortgage, it is essential to determine if it’s the best call. There are a range of reasons to remortgage, and the eventual decision usually boils down to individual needs and objectives. However, here are three common reasons why people take out a remortgage:

    • To Reduce Interest Rate:

    This is one of the primary reasons that homeowners choose to remortgage. Very few avenues are available to reduce the interest rate on an existing mortgage, and this is why remortgaging presents a great opportunity.

    A lower interest rate would generally imply lower monthly mortgage payments, and you can effectively ease up somewhat with your finances. 

    Furthermore, locking in a lower interest rate with a new mortgage can save you thousands of dollars in reduced payments over the years. In addition, this is a good way to speed up the process of building home equity.

    • To Cash Out Home Equity:

    A cashout remortgage loan allows you to borrow beyond what is needed to pay off the existing mortgage, and you keep the balance. This is a great way to release money from mortgages and tap into the equity that has been built over the years. 

    Based on how much you can remortgage your house for, lenders allow up to 80% of its appraised value. For instance, assume your mortgage balance is $400,000, and your home’s current value is at $800,000. This implies that 80% is $640,000. 

    To determine how much equity you have left, paying off the $400,000 mortgage balance leaves you with a balance of $240,000 that you can tap into. So, if you’re wondering can I remortgage to release equity, yes, you can. It is best to calculate ahead of time.  

    The funds acquired from here can be used to pay off high-interest debts like credit card debt or cover expenses like a child’s college tuition or home improvements. A remortgage offers a practical avenue to take care of these. 

    • To Speed Up Mortgage Payment:

    To speed up mortgage payment, a great option would be to remortgage your home. If you’ve recently come into a windfall gain, such as an inheritance or some more income, you could reduce your loan term. In essence, you could remortgage a 25-year loan into a 20 or 15-year loan. 

    This move is especially great if you plan to make it a retirement home. Opting for a shorter duration would imply an increase in monthly mortgage payments. However, since you have extra funds, you could use those to offset the extra. 

    The primary benefits here are that you pay off your loan faster and simultaneously save thousands in potential interest payments that you would have parted with over the span of the loan that you have now cut off. Since you would be paying faster, you would end up owning your home free-and-clear in record time too. 

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    Can I Remortgage with the Same Lender?

    Yes, you can opt to do a remortgage with the same lender. The only clause is that you may be required to part with a prepayment penalty for breaking your current mortgage. So, can you remortgage before the end of the fixed term? Yes, you can. However, any remortgage that occurs before the end of your closed term attracts this penalty. 

    Before deciding to go with your existing lender, it is advisable to consider options available in terms of their remortgage rate. Getting even a slight reduction can imply significant savings over the years. So, our best suggestion is to shop around!

    How early can you remortgage?

    You can remortgage at any point, provided a lender is willing to offer you the new mortgage. 

    Remortgage Considerations: Penalties & Payments

    Does it cost to remortgage? Yes, it does. Can you remortgage early? Yes, you can too, with some impacts.

    If you want a quick remortgage, you would likely be unable to wait until the end of your existing closed terms. This implies that you would incur prepayment penalties as a result of the early mortgage payment or remortgaging early. 

    Home appraisal costs may arise, especially if you’re working with a new lender. Appraising your home informs you about its present value and how much you can get in the form of a remortgage. This is important, especially if you’re looking for how to increase the mortgage amount. 

    The entire cost to remortgage a house would more often than not be covered by the long-term savings a new rate offers. When should I start looking to remortgage? You should start looking around at least 3 to 6 months before the end of your mortgage terms. 

    Frequently Asked Questions

    Here are some commons questions, answered on remortgaging a loan:

    What are the benefits of remortgaging a loan?

    Through remortgaging a mortgage loan, you can get better rates, a smaller monthly payment, or reduce the time to pay back the total on the loan.

    Is a remortgage the same thing as a mortgage?

    A remortgage is essentially a new mortgage you take out on the same property as your current mortgage, but with new terms.

    Final thoughts

    Taking out a remortgage loan can offer various benefits both in the short term and long term. Before opting for one, weigh your options based on what you want and need, and if this is one avenue to achieve these goals, then, by all means, go for it. 

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