In Canada, getting a 25 or 30-year mortgage is perhaps the most secure path to homeownership. Unlike in other countries, where the longest loan term can reach 50 years, Canada’s maximum term is only ten years. This means mortgagors will have to renew their loans at least once or decide to refinance, to fulfill their obligations.
It is important to understand the difference between renewal and refinance, as one approach may leave you worse off financially. Taking out a mortgage is probably going to be the biggest check you will write every month, so it is best to do research and pit the benefits against the drawbacks before renewing or refinancing.
Mortgage Refinance vs Renewal
When a loan term ends, mortgagors usually opt to renew. A mortgage renewal is when a new agreement is formed to extend terms with your mortgage holder. For instance, if at the end of your ten-year deal and you have not fully paid off your loan, you can simple renew and continue payment using the previously agreed upon rate. Many find this easier to do, as most banks do not make you qualify again, particularly if you pay your dues on time.
Some homeowners, however, choose to mortgage refinance to pay off debt. This is different from loan renewal. In mortgage refinance loans, your current deal is swapped for a different one, preferably with a lower rate. Refinancing allows mortgagors to replace an unsatisfactory loan with a more reasonable one. You do not need to wait for the end of your loan period to apply. Lenders can help you with refinancing your mortgage prior to then.
Renewing Your Mortgage
Most home mortgages are paid in full after roughly 30 years, with payments on a monthly basis. Since the terms are smaller and shorter, mortgagors have to either renew or obtain a different lender. The process is simple enough. The mortgage company will send you renewal papers that you have to sign in order to create a new loan. Your new mortgage is based on your outstanding balance at the time of renewal.
Most mortgagors tend to take out the longest mortgage term possible when interest rates are low. This, however, is not always the best option. There are several considerations you must keep in mind before a mortgage renewal. Mortgage holders usually allow mortgagors four months to decide if they want to renew. Take this time to ponder on your financial situation. You may want to choose a mortgage with a higher payment so you can pay it off sooner.
Determine Current Financial Goals
Before signing a mortgage renewal slip, consider your financial goals. Be sure that your new term suits your current and future needs. If your previous mortgage is a five-year fixed rate, the renewal will likely be the same. You may opt to change the terms if you are planning to downsize or there is a huge chance of moving to a different city in the next years. Choose a shorter deal. You will have to pay higher monthly fees, but with a lower interest rate.
Secure Better Mortgage Rate
Even if you are busy, it is best to take the time to review your renewal terms. Lenders make it easy for mortgagors to sign up again, offering discounts that are not necessarily the lowest rates available. You must learn to negotiate for a better rate. Mortgage holders will offer you one if they want your business. Use a broker and ask for a rate hold. This will protect you from interest rate increases for up to 120 days. You can also shop around and consider switching providers.
If you fail to negotiate a better offer with your current mortgage holder, it may be time to consider a different provider. Start to shop around early, several months before your mortgage maturity date. Once you have decided on one, you have to submit an application as if you are applying for a new mortgage. Processing usually takes a week, so it is best to leave leeway or you will be stuck with your current lender for your next mortgage term.
Between mortgage refinance vs renewal, some mortgagors prefer refinancing, especially if their current home loan is no longer working for them. With refinancing, you can replace your current loan with one offering better interest rates that make payments more sustainable in the long run. The process is similar when you took your current mortgage. First, you must determine your desired loan feature. Are you after lower interest rates or do you want to extend your loan term?
Once you have established the specific rate or term length that you want, start looking for qualified providers. Secure at least four loan quotes you have plenty of options. Settle on a lender and apply for a loan and wait for it to be approved. You must carefully review the terms and fees to avoid unpleasant surprises. Mortgage refinancing is not free. You have to pay fees to your new lender, including appraisal, inspection, origination, and closing costs.
Perks of Refinancing
To recap mortgage refinance definition, it is paying off your current loan debt by swapping your current mortgage for a new one. You need to weigh the advantages and disadvantages of your current and new loan to determine whether it is worth the cost of changing mortgage. Check how much you will save over time and how long you will regain the up-front costs of restructuring loans. The following are some of the mortgage refinance benefits.
You can secure a lower interest rate when you refinance a mortgage, depending on the market conditions. This is why mortgagors prefer mortgage refinance vs renewal. If your credit score is good, it also makes you eligible for mortgage refinance loans with great terms. Refinancing also makes sense if you plan to stay in your home for a long time. If you have a fixed-rate loan, it can help you avoid high-risk mortgages.
When Refinancing is a Bad Idea
There are conditions when choosing mortgage refinance to pay off debt is not the best option for you. You must avoid refinancing if your lifetime loan costs will be higher than with your old loan. Do not be swayed by lower monthly payment for mortgage refinance loans. This may save you money now, but it will cost you more in the long run.
Refinancing is also not good if you plan to move shortly. The money you saved from changing loans may not be sufficient to recoup the costs if you will leave after only a few years. You may also want to doublethink mortgage refinance if your new loan imposes pre-payment penalties since they will only add to your total loan costs.
Why are mortgages need to be renewed?
Renewals of mortgages could seem like a bother, but they are really advantageous to both the lender and the borrower. Mortgages may last a very long time, and throughout the 25–30 years that you pay off your mortgage, a lot can change. For instance, you could discover that you are earning more money and wish to modify your mortgage appropriately. Or perhaps you wish to explore alternative choices since you are dissatisfied with your current lender. On the other hand, in order to maintain the viability of their mortgage loans, your lender must adapt to market circumstances. It avoids locking either party into a lengthy contract that could eventually prove unworkable by permitting renewals.
Refine the terms of the mortgage
You have a lot more options with a refinance than a renewal. Nearly all loan terms will be up for discussion because you are negotiating a brand-new mortgage. You might even get even better terms that were not accessible in renewal and fully rework your mortgage to better suit your requirements.
Refinancing is frequently done to cut monthly payments, lock in a cheaper interest rate, or transfer from a variable to a fixed-rate mortgage. In addition, you do not have to wait until the term of your mortgage expires; you can refinance whenever you like.
Utilize home equity
You may be able to borrow more money from your home’s equity if you refinance. Your home equity increases as you pay down your mortgage and grows even more when the value of your property rises. When you refinance your mortgage, you can borrow up to 80% of the value of your house. This implies that you can access your home equity by borrowing the whole amount and then collecting the difference. The extra leverage you have acted as security for the larger loan, which is why banks permit larger borrowing amounts when refinancing.
For instance, if your mortgage only covered 30% of the value of your property, you could refinance for 80% of the value, pay off 30% of the balance, and keep the other 50%, which you could use right now and pay back later. This may be a fantastic method to access your home equity in one big amount without having to sell. You may use the funds obtained through refinancing for whatever purpose you choose, including investments or home renovations.
Consolidating debt is another advantage of refinancing with a larger loan amount. When you refinance your house, you may use some of the proceeds to pay off any high-interest obligations you have, such as credit card debt or vehicle loans, and consolidate them into one loan with a reduced interest rate. This will save you money over the long term.
Disadvantages of refinancing
There may be drawbacks to refinancing as well. Notably, your existing lender can impose a steep penalty for paying off your mortgage early, which might reduce the financial advantages of refinancing. Additionally, you will start a new loan from scratch, which implies that a new amortization time will begin. Even though you could have agreed to reduced payments, you might now have a longer payment time. Additionally, you will need to complete all the qualifying procedures necessary for your first mortgage, including demonstrating your income, obligations, and assets as well as passing the stress test for mortgages.
When to renew or refinance
A lot will rely on your existing circumstances and what you hope to gain from the procedure when deciding whether to refinance or renew.
Renewals are a less complex choice
If you would want to keep things simple, renewals are a smart choice. It will not take much effort on your side to renew your mortgage if you are satisfied with the terms and interest rates given and do not need to access your home equity just yet. It could also be worthwhile to wait until your renewal and then bargain with or shop around with other lenders if you are unhappy with your mortgage only because of the rates.
If your mortgage has run its course, it is an important factor to take into account. If you are still in the middle of your mortgage term, renewal is probably not an option for you, therefore if you want to make changes to your mortgage, you will need to wait or refinance.
Improve your mortgage terms by refinancing
If you wish to change anything outside your mortgage interest rate, you will also need to refinance. Even while it could cost more and take longer, if done properly, the advantages might exceed the disadvantages.
If you have a lot of home equity that you want to access all at once, refinancing is also your best choice. This is an excellent alternative, for instance, if you wanted to make improvements or use the money to buy a second home. You could decide to go for a HELOC instead if you do not need it all at once.
Which alternative provides better mortgage interest rates?
Finally, renegotiating or renewing a loan is frequently done to get a better interest rate. Overall, both can offer you an interest rate that is lower than the one you already have, but which one is preferable will depend on a number of specifics about your circumstances and the level of interest rates at the time.
Is your mortgage’s term about to end?
If you are one of the millions of Canadians with a mortgage, you will have entered into an agreement with your lender when you obtained the loan.
This agreement is in force for the duration of the mortgage term. Although it might be anywhere from a few months to several years, the typical time frame is five years. You will need to make a decision regarding your mortgage whenever this term is about to end. Although it is uncommon, you may decide to completely pay off your mortgage. The two most common ways for consumers to maintain their mortgages are by renewing them or refinancing them.