Refinancing Renewal

Introduction

Your mortgage is being amortized and you’re wondering what the best option is between a mortgage refinance or a renewal? Both renewing and refinancing your mortgage are solutions that come with various benefits. Refinancing allows you to free up cash or reduce your long-term costs, while a mortgage renewal ensures terms adjusted to your current income. Discover the advice from your Xperto mortgage broker to make the right choice between a renewal or a mortgage refinance.

Renewal and Refinancing: What’s the Difference?

Mortgage refinancing and renewal are distinct concepts, each offering advantages depending on your financial context and aspirations:
    • Renewal: keeping the current conditions of your mortgage or making minor changes to your loan agreement
After the first few years in your new home, are you satisfied with your real estate purchase and your mortgage amortization terms? When your mortgage term is approaching its end, the mortgage renewal option is the one to choose. It gives you the possibility to renew your mortgage for a new term, keeping equivalent conditions, such as the interest rate or the term length. Once the term expires, you have the opportunity to renew your mortgage. If you choose this option, you sign a contract maintaining the current terms of your loan, either with the same lender or by switching institutions if you are offered a deal with more attractive conditions. Renewal also gives you the possibility to modify certain aspects of your loan, such as its interest rate or the length of the new term.
    • Refinancing or changing important parameters of your mortgage
Mortgage refinancing allows you to adapt your current loan to new circumstances or a change in your goals. Do you want to consolidate various debts into a single loan or secure financing for a new project? Refinancing your mortgage is the recommended choice. This opportunity allows you to terminate your current mortgage contract and replace it with a new one. Refinancing is a solution that can include significant adjustments to your mortgage, such as extending the repayment period, modifying the property owners, or increasing the borrowed amount. It does not require waiting for the end of the term. At any point during the amortization, you can choose to refinance your mortgage, unlike renewal which is an option only available at the term’s maturity.

What Happens at the End of the Term?

When you sign your mortgage, a contractual period binds you to your lender: the mortgage term. Its maturity date depends mainly on the length of the term you choose when taking out your loan. Terms range from 6 months to 10 years, but the most common duration is 5 years. If you choose a 5-year term, your contract expires at the end of this period. It will be reviewed every 5 years and you can renew your mortgage, either keeping the initial term length and interest rate, or revising them. The maturity of your mortgage term is therefore a key moment, as you must make a decision about the future of your mortgage. One option is renewal with your initial lender. With this in mind, the institution contacts you, usually in the months leading up to the end of your term. Your lender then presents you with a contract including an interest rate and a new term for your mortgage, as well as the remaining balance to be paid at the signing of the renewal. When you renew your mortgage with your lender, you agree to continue repaying your mortgage according to the conditions you have chosen. The renewal extends your loan and you continue to follow your amortization schedule. Besides this option, other alternatives are also possible at the end of the term:
    • fully repay the balance of your mortgage, a solution rarely chosen by borrowers;
    • renew your mortgage with another institution;
    • refinance your mortgage.

When and How to Opt for a Mortgage Renewal or Refinancing?

When to Renew Your Mortgage:

It is advisable to start preparing for a mortgage renewal several weeks/months (4-6 months) before the maturity of the term:
    • before making your decision, assess your financial situation and consider the changes since the signing of your current term. Determine your short and medium-term goals as well as your financial needs. This analysis helps you get an idea of the terms suited for your next term;
    • once your situation is analyzed, it’s time to compare offers from your current lender with those from other lending institutions. Lenders can often guarantee a rate for up to 120 days, so don’t hesitate to shop around and explore available offers. Compare not only interest rates but also the term length, payment frequency, and any additional fees. Online mortgage payment calculators can help you get an idea of different scenarios;
    • don’t just settle for the first renewal proposal you receive. Try to discuss with your lending institution to get them to match proposals from other lenders.
If your current lender and their offer satisfy you, you can sign their renewal proposal. If you choose to renew and change lenders, you will generally have to follow an application procedure equivalent to the one for your initial mortgage.
    • Refinance Your Mortgage:
Refinancing is indicated for borrowers who wish to modify their contract for various reasons. Do you have major projects requiring financing, such as buying a secondary residence or your children’s education? This option allows you to access the equity in your property, up to 80% of your property’s value. Since the signing of your current term, interest rates may have dropped. When that is the case, refinancing allows you to obtain a lower interest rate and reduce the amount of your monthly payments. If you are repaying debts in addition to your mortgage, such as a personal loan or credit card, refinancing is also a solution to better organize your management. It allows you to consolidate your debts into a single mortgage payment. Several important steps are also inherent to refinancing:
    • before starting the process, clearly evaluate your needs and goals. Determine the amount of financing you are seeking. This approach helps you choose the most suitable financing solution;
    • gather documents that may be useful, such as your bank account statements, details of your income, and information about your property;
    • compare offers from different lenders to find the most attractive interest rates and conditions;
    • before making your choice, take into account all costs associated with refinancing. Application fees, legal fees, property appraisal fees, and potential penalties for terminating your current contract should be factored into your calculation. Ensure that the benefits of refinancing cover or exceed these costs.

What are the Advantages and Disadvantages?

Mortgage renewal and refinancing have strengths and weaknesses that can encourage or deter borrowers:

Advantages of Renewing Your Mortgage

    • Simplicity is one of the main advantages of mortgage renewal. If your agreement with your current lender is satisfactory, this process is relatively straightforward. You just have to sign the contract proposed by your bank to continue your mortgage repayments.
    • This solution saves you from looking for a new lender and putting together a new application. You thus maintain continuity in your relationship with your financial institution.
    • Renewal also offers the opportunity to negotiate the terms of your mortgage. You can negotiate a more attractive interest rate and a suitable term length with your lender.

Disadvantages of Renewing Your Mortgage:

    • With a renewal, it’s easy to simply settle for a straightforward renewal with your current lender for convenience, but you might miss opportunities to get a more attractive interest rate elsewhere. Other lenders may offer contracts with lower rates or conditions that better suit your financial situation.
Although renewal with your bank is usually free of charge, switching lenders can also incur a cost. These fees can include a range of expenses, including notary fees and property appraisal fees. If you choose to go with another lender, you are generally required to submit a new application. This step may involve a credit check and providing various documents, such as your pay stubs.

Advantages of Refinancing Your Mortgage

    • Refinancing gives you the possibility to obtain a lower interest rate, especially when rates have decreased on the market since your initial loan. You then benefit from a reduction in your monthly payments and savings on the total cost of your mortgage.
    • Refinancing also allows you to modify several characteristics of your loan, such as its duration or the type of interest rate, variable or fixed. This option can be particularly interesting if you have debts with high interest rates.

The Disadvantages:

    • There may be penalties for the early termination of your current loan or fees for property appraisal, legal fees, and application fees. These fees can vary by lender and must be considered before you decide.
    • Refinancing a mortgage can also increase the total amount you repay, even if the process can provide you with cash. This solution can thus lead to increased debt. Extending the amortization period can decrease the amount of your monthly payments but increase the total cost of your loan.
    • Refinancing is a process that involves terminating your current mortgage contract and signing a new one. The necessary steps can take time and require gathering various documents.
Since refinancing is technically a new loan, it is often necessary to go through the approval process again, including submitting to a mortgage stress test.

How to Choose Between Renewal and Refinancing?

The choice between a mortgage renewal and refinancing is a strategic decision that must be made based on the evolution of your personal context and your goals:
    • if you want to renovate your kitchen or another room in your home, refinancing can be an interesting solution. You will thus have access to funds and benefit from an interest rate often more attractive than that of a personal loan;
    • do you have a $200,000 mortgage with a fixed rate of 3.5% and a 5-year term? If your mortgage balance is on track to be repaid and you have no major projects planned, renewing your mortgage without changes is a logical option. This solution is also recommended when the interest rates offered by your lender are similar to those you have been paying since the signing of your current term.
To help you make your decision, ask yourself various questions:
    • How has your income evolved? Can you afford higher monthly payments? Do you need additional cash?
    • What are your short and long-term goals? Are you planning to do renovations in your home? Are you considering acquiring another property?
    • What are the current bank interest rate conditions? Are they rising or falling?

Conclusion

Renewing your mortgage is a safe and quick option if you are satisfied with your current mortgage. Mortgage refinancing offers more flexibility and allows you to find solutions for specific needs, such as reducing your payments or financing your new investments. For example, if you want to save on interest or make repairs to your home, refinancing can be interesting. On the other hand, renewal is the ideal choice to maintain the course of your repayments without complications. Take the time to evaluate your situation, your projects, and the trend of bank interest rates. Approach a mortgage broker: their market knowledge and experience are a help ensuring you make an informed decision.