Key Difference Between Mortgage Renewal vs Mortgage Refinance in Canada

Rohan Mathew

Do you want to find out core differences between mortgage refinancing and mortgage renewal?

Let’s dive right in…

When you take out a mortgage to buy a home in Canada, usually you’re not going to pay it off over the life of the term. Traditionally, lenders amortize the loan for periods between 15 and 30 years. However, the largest loan term you can obtain from a Canadian bank is 10 years. This ensures that most homeowners who use conventional financing would have to extend their loan at least once, if not several times. It is also possible to refinance the loan, as some borrowers do when their current loan period reach its limit. If you’re looking for mortgage refinance or mortgage renewal, a professional mortgage agent may help you better with the entire process involved. However, refinancing and renewal are two distinct procedures, and recognizing the difference is essential to make sound financial decisions.

Mortgage Renewal vs Mortgage Refinancing

What is Mortgage Refinancing

When you refinance, you’re effectively replacing your old mortgage with a new one. Rather than waiting for your current mortgage to expire, you can do it now. This is particularly appealing to people who are in one or more of the following situations:

  • You took out the first loan when interest rates were over a percentage point higher, but they are now at historic lows. If you’re paying 5.5% interest on your loan and have two or three years left on it, refinancing for the full period duration may be a smart idea, particularly if you don’t plan on paying it off early. To lock in a low rate for the next ten years, you may need to take out a closed mortgage (which means that you may face a penalty for early payment). However, if you make more money for the next ten years, you might save it and start earning interest on it, giving you even more money to put down when your lease is up for renewal. Interest rates are expected to increase, according to most economists, so locking in now could be a wise move.
  • You owe a lot of money on credit cards and have other high-interest loans. If you’re paying high interest on credit card debt and still owe 4 to 5 figures, refinancing your loan might make sense, particularly if current rates are close to where they were when you first took out the loan. You’ll save a lot of money on the interest; you won’t have to pay on your credit card debt.
  • If you want to renovate some or all of your house, or you need to complete a major improvement project. You can use the money that you saved from refinancing to upgrade your house. If you’re thinking to replace the entire kitchen, redo the master bathroom, or even building a second floor, you can use the cash from your refinancing to pay for that stuff.

Understanding Mortgage Renewal

If you started your mortgage with a five-year note that was amortized for 25 years, you’ll have to do mortgage renewal for the first 5 years if you can’t pay it off. If you haven’t refinanced and it’s about to end of your term, here are a few things to consider before starting with the process:

  • Are you in a situation where you’d like more payment flexibility? A closed mortgage typically has lower interest rates than an open mortgage. You cannot, however, pay in advance without incurring interest-based penalties. The prices on an open mortgage will almost always be higher, but you will mitigate this (and much more) by paying ahead of time. Consider the advantages of being able to pay off your note early without penalty, if you believe your income would increase.
  • Will fluctuating interest rates cause chaos on your finances? An adjustable-rate mortgage (ARM) has a lower interest rate at the beginning than a fixed-rate loan. You accept the possibility that your premiums will increase (to a pre-determined maximum) as market prices rise. If you pull out an open ARM, on the other hand, you will really get ahead of double and triple payments at low-interest rates.

However, both the mortgage renewal and refinance have their own pros and cons as explained in this article. For more relevant news on mortgage read our latest blogs.