Mortgage Renewal vs. Refinance
What Should You Do?
What You Should Know
- Mortgage renewal involves keeping an existing mortgage with a new interest rate for another term.
- Mortgage refinance involves replacing an existing mortgage with a new one at any time, but may incur prepayment penalties.
- When deciding whether to renew or refinance your mortgage, it is important to consider your current financial situation, interest rates, the housing market, and potential fees and penalties associated with refinancing.
| Term | Lowest Renewal Rates | Lowest Refinance Rates |
|---|---|---|
| -Year | % | % |
| -Year | % | % |
What is Mortgage Renewal?
At the end of your mortgage term, which is usually five years or less in Canada, you have the option to either renew your mortgage with the same lender, transfer it to a new lender, or refinance your mortgage. With a mortgage renewal, you’re keeping your existing mortgage with a new mortgage interest rate for another term.
What is Mortgage Refinance?
A mortgage refinance involves replacing your existing mortgage with a new one, by breaking your current mortgage contract and taking out a new one with different terms and conditions, such as a higher principal amount. Unlike a mortgage renewal, which can only occur at the end of your term, you can refinance your mortgage at any time during your mortgage term. However, if you refinance early rather than at the end of your term, you’ll have to pay mortgage prepayment penalties.
Mortgage Renewal vs. Refinance
| Mortgage Renewal | Mortgage Refinance | |
|---|---|---|
| Mortgage Prepayment Penalty | No | Yes, if refinanced before the end of your term |
| Ability to Borrow More Money | No | Yes, based on your home equity |
| Mortgage Discharge Fee | No | Yes, if changing lenders |
| Needs to Pass Mortgage Stress Test | No | Yes |
| Home Appraisal Required | No | Yes |
| Ability to Extend Mortgage Amortization | No | Yes |
What’s the Difference Between Mortgage Renewal vs. Refinance? 💡
The main difference between a mortgage renewal and a refinance is that you can borrow more money or extend your amortization with a refinance, and refinance rates are higher than renewal rates.
Mortgage refinancing is when you use your home equity to borrow more money on top of your existing mortgage. This then creates a new mortgage with a higher balance. On the other hand, mortgage renewals are only for the same balance amount. If you want to borrow more money when renewing your mortgage, you will need to refinance your mortgage. Another name for refinancing your mortgage is called a remortgage in Canada.
Mortgage renewals can only be done when your mortgage is near the end of its term, with some lenders allowing early renewal periods a few months before. Mortgage refinances can be done at any time, but prepayment penalties will apply to closed mortgages if you refinance before your mortgage is up for renewal. Use a mortgage prepayment penalty calculator to see how much it will cost to refinance your mortgage before the end of its term.
Factors to Consider: Renewal or Refinance?
Making the decision between renewing or refinancing your mortgage includes considering various factors, such as your current financial situation and future goals, interest rates, the housing market, and even the ease of approval.
Here are some important factors to consider when deciding whether to renew or refinance your mortgage.
Financial Situation
If you need to borrow more money, such as to consolidate debt, make renovations, or even to invest, refinancing allows you to access the equity in your home at a lower interest rate than most other secured loans. However, it's important to consider the overall cost of refinancing, including any fees or penalties, in comparison to other borrowing options. A common alternative is a home equity line of credit (HELOC), which lets you borrow money using your home equity without breaking your current mortgage contract.
If you’re having trouble affording your mortgage payments now that interest rates are higher, you can refinance to reduce your mortgage payments by extending your mortgage’s amortization period. However, this will result in paying more interest over the life of your mortgage.
If you don’t need to borrow more money, then renewing your mortgage will be the more suitable option. This allows you to continue with your existing lender and avoid any penalties associated with breaking your mortgage agreement.
Approval
It's harder to get approved for a mortgage refinance compared to renewing your mortgage, as you are essentially applying for a new mortgage. This means you will need to go through the full application process, including providing documentation, undergoing a credit check and passing the mortgage stress test. According to the CMHC, 85.6% of mortgage refinances at the same lender were approved in 2022. That’s a lot lower than the 96.7% approval rate for renewals in 2020.
If your financial situation has changed significantly since you first obtained your mortgage, renewing may be a safer option as it is less likely to be rejected by lenders. With some lenders, renewing may even be as easy as signing a renewal contract, or it can even be automatic with no action required on your part.
Mortgage Renewal vs. Refinance Approval Rate
| Mortgage Renewal | Mortgage Refinance |
|---|---|
96.7% Approved | 85.6% Approved |
Source: CMHC
Interest Rates
Whether you renew or refinance your mortgage, you'll be resetting your mortgage rate to what current market conditions are offering. This means it's important to keep an eye on interest rates and assess if they are lower or higher than when you first obtained your mortgage. If rates are now significantly lower, refinancing your mortgage early may allow you to take advantage of lower interest rates, potentially resulting in significant savings.
If you’re getting close to the end of your mortgage term already, then you can take advantage of early mortgage renewals that can let you renew up to 4 months early, rather than refinancing and breaking your mortgage.
Oftentimes, you may see that mortgage rates can differ between refinancing and renewing. Typically, refinance mortgage rates are higher than rates for mortgage renewals.
Housing Market
If housing prices have significantly increased since you first obtained your mortgage, refinancing may allow you to access more equity and potentially borrow more money at a lower interest rate. On the other hand, if home values have decreased, renewing may be the safer option as it allows you to continue with your current mortgage terms.
Since you can refinance for up to 80% of your home’s value, a 25% drop in home prices, which TD had predicted would happen in 2023, would potentially put you into negative equity. That's when you owe more money on your mortgage than your home is worth.
Fees and Penalties
Since a mortgage refinance involves replacing your mortgage with a new one, there are more fees associated with refinancing compared to a simple renewal. If you have a collateral charge mortgage, fees that are involved with a mortgage refinance include mortgage discharge fees, registration fees, and legal fees. With a standard charge mortgage, you may be able to simply transfer the mortgage charge from one lender to another without engaging a real estate lawyer. If you’re refinancing before the end of your term, you’ll also have to pay mortgage prepayment penalties.
Mortgage Refinance Penalties 💡
You won’t need to pay any mortgage penalties if you renew your mortgage within your lender’s allowed renewal period. If you renew or refinance earlier than that, then you will need to pay mortgage prepayment penalties. This can range from a few months of interest to tens of thousands of dollars from interest rate differential (IRD) penalties.
Waiting until your renewal date can help you avoid penalties. If you can’t wait until your renewal date, then a blended mortgage can help you avoid penalties while partially locking-in a new rate and/or accessing your home equity.
Another alternative to a mortgage refinance would be to use a home equity line of credit (HELOC), which allows you to borrow money from your equity without having to break your mortgage before renewal.
Making the Decision: Which Option is Right for You?
| Mortgage Renewal | Mortgage Refinance |
|---|---|
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Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.