Renewals and refinances are both very useful tools to homeowners who want to change the terms of their mortgage. Let's look at the differences between the two. 

What Is A Renewal?

When you start your mortgage you choose a term (the length of time you are committed to a particular rate).  It may be fixed or variable, but the length of term is what determines your renewal date, also known as your mortgage maturity date.   If you choose a 4-year fixed then your renewal will be 4 years later.

A renewal is simply a renegotiation of your mortgage term when your prior term ends. You can choose to select a product and term that your current lender is offering, or you can choose to move to another lender with more competitive rates or products that are a better fit. If you move your mortgage to another lender, this is often referred to as a switch or transfer. You will need to re-qualify to move your mortgage. If you stay with your current mortgage lender, they generally do not re-qualify you. But don't let that prevent you from looking at options - your current lender is counting on that! They want you to take their offer, which can make them more money as they often offer rates above the current market offerings.

You continue on your same amortization as you were on before, so for a standard transfer or switch the registration to your land title does not need to be removed. The new lender can simply revise the registration to show their name instead of your old lender. If you had a 25-year amortization to start, you now have a 21-year amortization. If you made extra payments to your mortgage, this may have been shortened.

The cost to switch to another lender is generally free, unless your current lender has registered your mortgage collaterally or in the unlikely event an appraisal is required. There are some mortgages being sold that are simply not transferable (such as BMO Smart mortgages; their low rate offering) and require a bona fide sale to leave the lender. These are not switchable. You actually can't leave these lenders without selling your home and they even put restrictions on that, not allowing it to be a private sale.

What Is A Refinance?

A refinance is where you change the structure of your mortgage.  This can be extending out the amortization to lower your monthly payment, changing to a better term or rate, increasing your mortgage amount to consolidate debt or pull out money, or it can be to remove or add people to the mortgage contract.

You do need to qualify for a refinance, so you can expect to provide updated information on your income, the property, etc. You must have at least a 20% equity position to be able to qualify for a refinance. Or, said another way, your maximum mortgage amount on a refinance is 80% of the current value of the property.

If you change the terms and structure of your mortgage, the current registration to your land title needs to be removed and a new one added, increasing the costs of the transaction.  These include legal fees, and possibly appraisal costs and breakage penalties, depending on the situation. A refinance can be done with your current lender or, once again, your options with other lenders may be more attractive.

There are lenders who have mortgages that do not allow you to refinance with other lenders. They may allow you to refinance with them, but only at whatever rates they offer you, and only if you qualify under their policies (and they know you are stuck with them!).

Why These Terms Are Used Together

The reason people think about refinancing and renewing as the same thing is because doing them at the same time can save you money.  When your mortgage is renewing, you are able to refinance without any breakage penalties so it is the lowest cost time to look at a refinance.  That said, penalties can be small depending on the type of mortgage you have, so even if you are not renewing it still may make sense.

 If your renewal is coming up or you want to understand if refinancing would work for you, contact me to talk through your options.