Should you renew or refinance your mortgage?
July 2022 – 15 min read
When your mortgage term ends, you may choose to renew or refinance your mortgage.
This means you may want to keep paying your mortgage as it is, change the terms of your mortgage, or access some of the equity in your home to pay for things like renovations.
Which process you choose will depend on your personal circumstances, and research along with expert advice can help you decide which is right for you.
Is your mortgage term expiring?
If you’re 1 of the millions of Canadians who have a mortgageOpens in a new window, you’ll have signed a contract with your lender at the time you took it out.
This contract is in effect for a period of time, known as the mortgage term. This is commonly a 5-year period, but it can range from a few months to several years. Once this term is close to expiring, you’ll have to decide what to do with your mortgage. You may choose to pay off your house in full, although this isn’t common. Most people choose to keep their mortgage through 1 of 2 ways – by renewing it or refinancing itOpens in a new window.
Renewing a mortgage
If you choose to simply renew, you agree to keep paying off your current mortgage but with a new agreement in place. When your term is nearly up, your lender will be in touch to offer a new mortgage rate and term. You may receive phone calls before receiving a renewal statement that includes:
The balance or remaining principal as of the renewal date
The payment frequency
Any additional fees or applicable charges
Refinancing a mortgage
You can take the opportunity to renovate by refinancing your mortgage to access the equity in your home either when you term is up, or before it ends.
Equity is the difference between the value of your home, and how much you still owe on your mortgage. The available equity in your home will increase as you pay down your mortgage, or as the value of your home goes up.
Let’s look at an example. Let’s say your home is worth $500,000, and you owe $350,000 on your mortgage. This would mean you have $150,000 in home equity.
Why access the equity in my home?
There can be many reasons why you may want to access some of the equity in your home, such as:
You want to pay for renovations or repairs.
You may want to use the money to put a down payment on or buy a cottage.
You want to consolidate debts and use the money to pay off high-interest loans.
How do I access the equity in my home?
When you refinance your home, you can get a home equity line of credit (HELOC) or increase your existing mortgage balance.
You can borrow up to 80% of the appraised value of your home, minus the amount still owing on your mortgage.
Refinancing could impact the interest rate on your new mortgage, and there may be fees applicable such as legal or appraisal fees. However, interest rates on loans secured against your home tend to be lower than other types of loans. Refinancing could also impact the money you receive if you sell your home as you’ll have a larger mortgage, which is another factor to think about.
Not all lenders will offer home equity financing options, so if this is something you’re interested in, make sure you ask your lender in advance of your term ending so you can discuss your options. As refinancing technically involves taking out another loan, you’ll need to go through an approval processOpens in a new window before you can borrow against your home equity.
Both renewing and refinancing offer benefits that may help you achieve your financial goals and plans for your home.
Learning more about the key differences between each option will help you decide which choice is right for you.
If you have questions or need help deciding what to do at the end of your mortgage term, speak to a credit planning consultant (CPC).
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.