Mortgage Refinance vs Renewal - Understanding the Difference
When you got your last home mortgage, the contract was for a fixed number of years, typically 1 to 5 years, called the "term." Towards the end of each mortgage term (until your mortgage is paid in full or your property sold), you are required to arrange a replacement mortgage contract. You'll need to either renew or refinance.
Mortgage Renewal essentially means carrying forward your mortgage into a new term with the same lender (or a new one), keeping the loan amount and the period over which the loan is to be repaid (the amortization period) unchanged.
Mortgage Refinancing, on the other hand, is the process of obtaining a completely new mortgage, offering you the flexibility to modify critical terms of your loan, such as the repayment period, monthly payment amount, add or remove borrowers, or to unlock the equity in your home for immediate cash access.
Both options can have financial implications, so it's important to consider your long-term goals and current financial situation when deciding between the two. We'll talk about these items in more detail next.
Mortgage Renewal Loan Program
- Timing: Initiate this procedure during the last four months of your existing mortgage term. Be aware, however, that your current lender may delay notifying you, aiming to limit your time for making an informed decision.
- Purpose: Allows you to renew your mortgage at prevailing interest rates, but with no change to the amortization period or loan amount. If you switch lenders, this is called a "switch/transfer." A common reason to switch lenders is to get a lower interest rate than your current lender is prepared to offer.
- Process: You current lender will typically send a renewal notice before the term expires. You can choose to renew with the same lender or shop around for a better rate with a different lender. A mortgage broker (like us) can help you shop around, but if you do want to switch lenders, you will need to re-qualify.
- Cost: Usually, there are no costs to renew your mortgage with your current lender or to switch lenders.
- Tip: Most mortgage lenders are well aware of our busy life schedules and propensity to leave things to the last minute, hence tend to offer less than competitive rates at renewal hoping that you simply accept their renewal offer without researching what the competition has to offer. The end result of "trusting your lender" is that it takes you years longer to be mortgage free. and they get record profits. Act now - register your mortgage renewal date and we'll reach out to you.
Mortgage Refinance Loan Program
- Timing: Can be done at any time during your mortgage term, however - to avoid a mortgage break penalty - it is best to wait until your mortgage renewal date is 4 months away or less.
- Purpose: Allows you to replace your current mortgage with a new one, often for the following reasons:
- Accessing home equity (e.g., for renovations, investments, or debt consolidation)
- Securing a lower interest rate.
- Reducing your mortgage payment / managing cash flow.
- Changing the mortgage type (RELOC or Reverse / Equity Release for example) or term length.
- Removing a partner from a mortgage, such as in divorce or other relationship break down.
- Process: You need to re-qualify for the new mortgage based on current financial conditions. Refinancing can involve switching lenders or staying with your current one.
- Cost: There will be an appraisal fee, legal fees, and possibly a new mortgage insurance premium. If you are breaking the existing mortgage contract before the the renewal date, there could be a significant payout/break penalty (ask your current lender).
Frequently Access Questions
My previous mortgage was CMHC-insured. Will that get me a lower rate?
Yes, a previously insured mortgage will get the benefit of best insured lending rates provided that you are renewing your mortgage only. If you are refinancing your mortgage then the benefits of the original CMHC loan -insurance certificate will be lost when the loan is replaced. Insured lending rates are typically 0.3-0.5% lower than non-insured rates.
Can I negotiate my interest rate at renewal?
Yes, you can negotiate your interest rate and other terms during renewal or refinance. It’s a good opportunity to ask for a lower rate, especially if market rates have decreased. If you are working with a mortgage broker, that is their job to find you better terms than your current lender is willing to offer you.
Do I need to requalify for a mortgage at renewal?
If you stay with your current lender, requalification isn’t typically* required. However, if you switch lenders, you will need to undergo the qualification process again. You can find out quickly from us if you'd likely be able to switch lenders by editing or creating your client profile here.
*My credit rating has tanked during my last mortgage term. Do I need to requalify for a mortgage at renewal?
Yes, lenders often review their client's credit rating before offering a renewal. If you no longer meet their minimum credit criteria you will be asked to find a different lender or be offered terms at much higher rates.
If I break my mortgage contract early to renew or refinance, is there any way to reduce a mortgage break penalty?
Yes, it is important to understand your prepayment features of your current mortgage and whether this can be factored in to decrease any penalty incurred on a refinance. On an early renewal, the new lender will often allow the borrower to roll in up to $3000 of penalty into the new mortgage.
Whatever the reason, or if you are just looking to benefit from a lower mortgage rate, it can make sense to refinance your mortgage.
What happens if I don’t (or can't) renew my mortgage?
If you don’t renew your mortgage, it could go into default. Most lenders will automatically renew your mortgage into a standard, often less favorable, term if they don’t hear from you or you are not eligible to renew. This often the case when you are in a pending divorce situation, where a separation agreement is required.
How much equity do I need to refinance?
Typically, you need to retain at least 20% equity in your home to refinance. However, some lenders offer refinancing in a divorce situation with less equity, with additional CMHC-insurance costs.
What’s the difference between refinancing and getting a home equity line of credit (HELOC)?
Refinancing replaces your existing mortgage with a new one, while a HELOC is a separate loan (in "second position") that allows you to borrow against your home’s equity without altering your existing mortgage.
What is an early renewal?
An early mortgage renewal is when you renew or refinance your mortgage before the end of the current term, usually to take advantage of better interest rates or to modify the terms of your loan. While this is often a strategic financial move, it's essential to calculate the potential costs and benefits based on your situation. We can help with the analysis.
Should I accept an early renewal offer from my current mortgage lender?
Proceed with caution and seek impartial counsel first! It's wise to scrutinize the reasons behind your lender's proposal for an early renewal. Could it be a strategy to lock you in without exploring better options?
Tip: When you have a working relationship with a mortgage broker, you will always have independent access to the mortgage market, so when renewal time is upon you, you can easily find out if your current lender is still the best lender for you. You are welcome to register your next renewal date here and we'll keep you informed.
If I want to explore my mortgage renewal or refinance options, what is my next step?
To advise you on your options, we simply need some basic information about you, where you live, and your objective. There are many lender programs in Canada; some will apply and some won't depending on the property type, the property location, and your financial situation. Your answers to the following questionnaire will make the best use of your time and ours, and enable us to respond quickly and accurately with options that you do have.
