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Renew or Refinance? Navigating Your Mortgage Choices for Financial Wellness

For Canadian homeowners, the end of a mortgage term brings a pivotal financial decision: to renew or refinance. Mortgage renewal involves continuing with your current mortgage for another term, while refinancing allows you to restructure your mortgage entirely, potentially accessing better rates or tapping into your home’s equity.

Mortgage renewal and refinancing both offer unique advantages and have significant financial consequences. Understanding these options is key to making an informed decision that aligns with your financial goals.

Understanding mortgage renewal and refinancing

When your mortgage loan term ends, you can pay it off in full, extend it for another term or replace it with a new home loan.

What is mortgage renewal?

Mortgage renewal occurs when your current mortgage term ends, and you agree to a new term with the same lender under potentially revised conditions. This process typically happens every few years, depending on the length of your original term.

How mortgage renewal works

Before the end of your term, your lender will send you a renewal statement or notice outlining the new interest rate, loan balance, term and payment options. You can either accept the offer or negotiate better terms. You can also switch lenders at the end of your mortgage term by applying with a new bank or mortgage company, although you’ll need to pay additional fees.

What is mortgage refinancing?

Refinancing involves replacing your current mortgage with a new loan at the end of your term, either with your current lender or a different one. Your interest rate and mortgage details could change significantly, and you can access home equity by borrowing a larger amount than your current mortgage balance.

How mortgage refinancing works

When refinancing, you apply for a new home loan, which pays off your existing one and replaces it with a new mortgage contract. The fresh agreement is based on your present financial situation and current mortgage rates; it may have a different interest rate, terms or payment structures than your current loan. You can refinance your mortgage anytime, although doing so before the term ends may incur penalties.

Deciding whether to renew or refinance

Both renewing and refinancing a mortgage provide advantages and can be the right path, depending on your situation.

Benefits of renewing

Benefits of refinancing

● Maintain stability. Renewal allows you to continue with your existing lender and mortgage structure, minimizing the hassle of switching.

● Avoid penalties. If you’re satisfied with the terms, renewing avoids fees associated with breaking your mortgage or refinancing.

● Can make adjustments. Renewal allows you to make a lump sum payment, change your monthly payment amount and frequency or alter your term length without refinancing.

● Lower interest rates. Refinancing when interest rates have dropped can lead to significant savings over the life of your mortgage.

● Access home equity. Refinancing allows you to borrow against the equity you’ve built in your home for renovations, investments or other financial needs.

● Adjust mortgage terms. You can refinance to shorten the mortgage term, extend it to lower monthly payments or alter the loan structure.

Homeowners opt to renew their mortgage to continue with their existing loan and lender, while some homeowners may choose a refinance to access home equity, leverage lower rates or make significant changes to their mortgage structure.

Renewing your mortgage at the end of its term makes sense if:

You’re satisfied with your lender and the rate and terms of the renewal.
You don’t wish to access your home’s equity.
You want to avoid fees and prepayment penalties associated with refinancing.
You want to adjust your payment frequency or amount.

Refinancing your mortgage makes sense if:

You want to access your home’s equity.
You wish to alter the conditions of your mortgage significantly.
Refinancing could secure a better rate than renewing.
Your financial situation has changed.

What to consider when deciding to renew or refinance

The end of your mortgage terms provides a unique opportunity to adjust your home loan, access home equity or reassess your home payoff. When weighing your decision to renew or refinance, consider the following factors.

Your current financial situation. Review your income stability, expenses and any expected changes. Are you confident in your ability to meet your mortgage payments, or do you need to make significant adjustments?
Your long-term financial goals. Determine how your mortgage decision aligns with your broader financial objectives, such as paying off debt, saving for retirement, funding education or preparing for major life events.
The terms of the renewal or refinance. Although the interest rate and payment could change, a mortgage renewal essentially continues your current mortgage. On the other hand, a refinance is a new loan based on your finances and current mortgage interest rates. As a result, one path may yield a better interest rate and mortgage details over the other. Compare the interest rate, payment options, terms, penalties and other loan stipulations to see which option is more favorable.
Comparing lenders. Even if you’re happy with your current lender, exploring the interest rates and terms other lenders offer is essential. If you find better rates elsewhere, use them as leverage to negotiate a better deal with your current lender during renewal or refinancing discussions.
Costs and fees. Renewing with your current lender is often cost-free, but if you switch lenders, there may be legal and administrative fees. Refinancing typically involves appraisal fees, legal fees and other administrative costs, and if you refinance before the end of your term, you’ll also incur a penalty. Compare the fees of each option to see if the costs align with your goals.

Deciding whether to renew or refinance your mortgage requires careful consideration. Once you’ve reviewed your financial situation, long-term goals and the terms available, consider seeking professional advice to ensure your decision is informed and tailored to your circumstances.