In 2017, I purchased a pre-construction unit at a building named “The Plant”. It took 3 years to build, and by December 2020 ( holy Covid rental rates), I closed on the property. The mortgage I chose was a fixed 5-year at a safe 2.5% interest rate, a rate I would kill for again.
That’s right, my 5-year term is up, so I’ll face a higher rate ( probably somewhere around 3.9%) and will have to decide if I’m going for a mortgage renewal or mortgage refinance. Mortgage refinancing and mortgage renewals are different in many ways; below are the key differences.
- A mortgage renewal is the continuation of your existing mortgage with the same lender and for the same balance, carrying over into the new term. The amortization schedule usually stays the same (unless you ask for it to be changed), but the rate, the term length and the type ( variable vs. fixed) may change.
- A mortgage refinance is a completely new mortgage product. When you refinance a mortgage, you are changing something substantial, ie, the amount mortgaged, the lender or the individuals who are borrowing.
What are the common reasons why someone would choose to refinance their mortgage over renewing it?
Before we dive in, are you thinking about buying a home soon? Get the process started by booking an appointment.
Removing Someone from the Title
Here’s a real-life example from my client, Reid and his ex-girlfriend, Mary. Reid and Mary had a 3-year fixed mortgage on their Beaches home, and the renewal was up in July. Marina and Reid decided that at the end of the term, Reid would buy out Marina’s share of the home and remove her name from both the title and the mortgage agreement. To do this, they needed to refinance their mortgage. When mortgage refinancing, Reid enlisted a new lender to help him borrow more money than before and received a new mortgage rate.
Real estate has often been considered a safe investment. If you’re wondering how you can use real estate to safeguard your future and grow generational wealth, here are a few more resources you might find helpful:
- How to Extend Your Retirement Savings Through Real Estate
- Women Make Terrible Real Estate Investors!
- How to Gain Wealth from the BRRRR Method
- Calculating Taxes When Selling a Rental Property (Without Losing Your Mind!)
Accessing Equity
Now back to my own mortgage renewal vs. refinance decision. My husband and I are currently building a home and might be short on the funds needed to complete the renovation process. My husband suggested we use some of the equity from the condo to help with the home build. To do this, I would need to refinance my mortgage instead of renewing it at its current amount. To access the equity I have in the condo, I would be taking on a larger mortgage, and my payments would increase accordingly. Right now, at 4% the increase in payment per 100k is roughly $525.
Instead of selling my condo to gain access to the equity in the condo, I can refinance it to “have my cake and eat it too”. Does it sound easy? Well, it isn’t always. I learnt that I had to do a few things before someone would allow me to refinance.
To give me a refinance, the lender has to evaluate my home’s available equity. To do this, they take my home’s value and they minus the existing mortgage balance.
It looks something like this:
-
Home’s Value = $650,000
-
Existing Mortgage = $350,000
-
= $300,000 in equity ( if I were to sell)
Lenders allow you to refinance up to 80% of your home’s appraised value (pending other loans you may have on other properties or HELOCS).
For the sake of this explanation let’s pretend I don’t have any other debt (wouldn’t that be nice?)
-
The lender would loan me up to 80% of the appraised $650,000.
-
650,000 x ..8 = $520,000 mortgage amount. Meaning I could have access to $170,000 equity to use for my home building project.
-
Taking this $170,000 would mean that I pay (@4%) an extra $900 a month in mortgage payment for refinancing my mortgage.
I’ve decided to renew my mortgage at $100,000 higher than I already pay. With this decision to refinance instead of renew or sell I have been able to keep my property and gain access to much needed equity for my home build. I have made the conscious decision to keep 30% of the equity in the condo in case of market changes.
Many homeowners use equity for home improvements. If this sounds like you, here are a few more posts you might enjoy:
- Renovation Guide Part 1: Home Renovation Overview
- Toronto’s Renovation Rebate Programs
- Can I Build a Garden Suite on My Property?
Getting a Better Rate
Between 2020 and 2022, we saw interest rates as low as 1.49% while the average was somewhere around 2.5%. Long gone are the days of interest rates in the “2s” and now many will face rates in the “4s”. Depending on the institution lending or the competency of the mortgage broker, the rates may be vastly different. The truth is that you should absolutely shop your mortgage rates with different lenders and brokers to get the best rate (and the best product that works for you). If your current bank is offering you a 4.25% rate but my mortgage broker is offering you 3.8% – that’s a $25/100k difference. On a $700,000 mortgage, that’s an extra $175 a month of savings and $2100/year.
Getting Better Terms
Rates are not the only thing to consider when deciding between a renewal and refinance in Canada. The terms set out in the mortgage agreement are also important to note.
Important terms to consider when refinancing your mortgage are:
- Prepayment options
- Payment increase privileges
- Portability
- Payment flexibility
Prepayment options
Lenders usually allow for 10 to 20% of the original principal amount to be paid off once a year. This means that if you had a $500k mortgage, you’d be allowed to pay off $50-100k per year on your anniversary date.
Prepayment increase privileges
This allows you to increase your regular payments by up to 15-100%. This means you could double your payment (if your income allows for it), allowing you to pay down your mortgage faster.
Portability
As someone who likes to move around money through the acquisition and disposition of properties fairly regularly, this element is very important to me. Portability ensures I can transfer my existing mortgage to a new property without penalty. On my last property, I needed to transfer the amount to the new home AND to increase the borrowing amount; this is considered a “blend and extend”.
Payment Flexibility
In the past 3 years, we have seen higher default rates than historically normal. Having a mortgage product that allows you to skip a payment or two a year has been vital for those enduring mortgage stress.
Does the thought of renewing your mortgage make you start to sweat? Read our blog to learn How to Reduce the Shock at Mortgage Renewal Time
When Can I Renew My Mortgage?
Now that we understand the differences between renewing and refinancing a mortgage in Canada, let’s look at the timelines for both options.
How early can I renew my mortgage? Most big banks will allow for 120 days before the mortgage maturity, whereas credit unions etc., may allow for up to 6 months. If the rates are higher when renewal dates are due, most people will opt to keep their current rate until their term is complete.
Refinancing your mortgage means getting a new one, meaning you will need to requalify for the requested amount. If your income has dropped or you’ve been on maternity leave, your qualification may not be large enough for the loan. In this case, it would be smart to renew early to avoid the lender’s disapproval.
Do you have specific real estate questions? I’ve got answers! Here are some more posts that might apply to your situation:
- What to Know About Buying a Victorian Home in Toronto
- Why I am the Go-To Agent for Physicians and Medical Professionals
- What is Co-Ownership in Real Estate?
Refinancing Before the Term is Up
I asked my lender last year if this was an option, to which he said, “You could, but that means you’re breaking your current mortgage contract.”
This means I would be paying the penalty for doing so and at my fixed rate that option wasn’t attractive. Under a variable mortgage contract, I would have only paid a 3 month interest penalty. I decided to wait until the term was over to refinance as I avoided penalties, and the rates are now lower than when I originally requested the refinance.
If you’re looking for advice on refinancing or renewing your mortgage, I have amazing professionals who can guide you through the sometimes confusing process.
Get in touch today. Fill out the form on this page, call/text me at 416-728-5401, or email me at ddemerino@royallepage.ca.
