A mortgage is designed to help you afford the cost of acquiring your own home and living in it for years to come. After making a down payment, lenders front the rest of the cost of the sale, with the binding agreement that they will be paid back with interest over the mortgage term. But your mortgage plan isn’t — and shouldn’t be — inflexible.
Your mortgage is a reflection of your financial situation — its amount indicates how much you can invest in this lifetime investment, expressed in regular payments you can sustain for years to come. While this amount is calculated based on your credit history and both current and projected finances, it is a plan that must be able to accommodate changes in your financial situation to sustain your loan and guarantee comfort in your own home.
During the mortgage, you could decide to upgrade from a starter home to a larger property to accommodate a growing family or relocate for your dream job. Or, simply, the loan period ends before the mortgage is paid off.
Your mortgage plan needs to be flexible enough to suit your changing financial situation. To do this, lenders offer mortgage renewal and refinancing options to help you manage the loan according to your changing financial needs.
Mortgage Renewal or Refinance — Why You Need One
The reality is, most Canadians never end up paying their initial mortgage in full; they acquire new loans, or the terms are renegotiated when they sell their property in favour of an upgrade or downsizing as their circumstances change.
Traditionally, loans have a period of 15 to 30 years, but banks only offer terms of up to 10 years. During this time, the mortgage may not have yet been paid in full, and you will need new funding to cover the rest of the loan. This requires either a mortgage renewal or refinancing to suit your financial situation.
What is mortgage refinancing?
Mortgage refinancing requires renegotiating the terms of your existing mortgage plan as the term approaches its end. Refinancing allows you to access the equity in your home, as well as lower other loan costs through a new, lower interest rate. Refinancing is an attractive option for consolidating other existing debt to pay for large expenses, such as home renovations.
While renegotiating loan terms before the end of the loan period typically results in prepayment charges, mortgage refinancing at the end of the term allows you to avoid these. Still, prepayment charges tend to be smaller than the savings potential of a refinanced mortgage with a much lower interest rate.
What is mortgage renewal?
In contrast, mortgage renewal is much more straightforward. Simply, it’s renewing your mortgage plan with a new term and interest rate if the full amount has not been paid off at the end of the term. The renewed mortgage plan is designed to pay off the remaining amount in your loan.
Mortgage renewal vs. refinancing — which is best for me?
Both mortgage renewal and refinancing options are designed to help you manage your loan and secure your financial and living situation. These help you keep your home and accommodate changing needs through manageable monthly payments until your mortgage has been successfully paid off. Choosing the best option comes down to your current financial situation and future outlook.
When is mortgage refinancing a good idea?
When Interest Rates Are Lower
If interest rates were at least one percentage point higher when you first took out the mortgage, you should consider refinancing. Mortgage refinancing provides you with a better, lower rate throughout a new term, especially if you have a closed mortgage for which early payments would incur penalties. Mortgage refinancing with lower interest rates results in lower payments for the rest of the term, especially if you don’t foresee making early payments anyway.
You Want to Consolidate Debt
Debt consolidation is necessary if you have a huge amount of outstanding credit card and other debt obligations. These all result in high-interest rates, which aren’t financially healthy or sustainable in the long run.
Mortgage refinancing allows you to consolidate these debts and benefit if the interest rates are close to where they were when you first took out the mortgage. This frees up valuable dollars previously paid towards high-interest obligations.
You Are Renovating
A home renovation or home improvement project is no easy — or inexpensive — feat. depending on the project and the amount of damage that requires repair, you will need to have saved up substantially to afford it. Mortgage refinancing provides you with the cash to do this, essentially giving you a desperately needed new kitchen or washroom without the large, upfront, out-of-pocket expense.
When is mortgage renewal a good idea?
Your Loan Term is Ending, and It’s Unpaid
Depending on the loan amount and financial situation — which is based on the property you acquired and available finances for paying it off — your mortgage may have not yet been fully paid at the end of the original loan term. Lenders offer mortgage renewal to reset the loan terms — its length, principal and interest amounts, and frequency.
A mortgage renewal puts you in a better position to reduce the monthly principal and interest payments and cost of borrowing, and even arrange to pay off the mortgage sooner without impacting the comfort of your growing family or financial stability if your income changed.
You Want Flexible Payment Options
A mortgage renewal allows you to start fresh and move from a closed to an open mortgage. Initially, many first-time buyers or those with fixed incomes and finances prefer the predictability of a closed mortgage due to lower interest rates. However, these savings are quickly erased if their circumstances quickly change and want to pay off the mortgage early, resulting in interest-based penalties. In contrast, an open mortgage presents with higher interest rates, but without the risk of prepayment penalties.
A mortgage renewal allows you to switch to a more flexible payment option, especially if your income changes, and you wish to pay off your mortgage sooner with early, penalty-free payments.
It’s Hard to Budget for Fluctuating Interest Rates
You may have opted for variable interest rates, hoping for lower rates and corresponding savings when the market is favourable. But doing so always comes with the risk of a sudden uptick in interest payments, if the prime lending rate increases.
A mortgage renewal can help you escape fluctuating interest rates and switch to fixed rates if they’re easier to budget for or opt for a hybrid model that allows you to take advantage of low rates when possible while shielding you from the shock of a sudden climb in market rates.