- A mortgage refinance typically involves accessing home equity or changing terms mid-term, while a renewal extends an existing mortgage at term end.
- You should consider doing both simultaneously when your mortgage is up for renewal and you need to access home equity (e.g., for renovations, debt consolidation, or investments).
- As of November 2024, uninsured mortgage renewals switching lenders no longer require re-qualification at the OSFI stress test rate, but refinances still do.
- Refinancing incurs legal fees, appraisal costs (typically $300-$500), and potentially a new title insurance policy, which are usually not part of a simple renewal.
- The Bank of Canada's policy rate directly influences variable mortgage rates and indirectly fixed rates, impacting the cost-benefit analysis of both refinancing and renewal.
You should consider doing both a refinance and renewal at the same time when your existing mortgage term is ending, and you also require a significant change to your mortgage beyond just extending the term, such as accessing home equity or consolidating debt. This combined approach allows you to achieve both objectives efficiently and potentially save on certain costs by completing the transactions concurrently.
It's a strategic move to optimize your financial position, ensuring your mortgage terms align with both your current equity needs and future payment capabilities.
What is a mortgage refinance in Canada?
A mortgage refinance in Canada involves replacing your current mortgage with a new one, often to change the terms, access home equity (known as an 'equity take-out'), or consolidate debt. Unlike a renewal, which occurs at the end of your mortgage term to extend financing with a new interest rate, a refinance can happen at any point during your mortgage term.
The new mortgage could be with your current lender or a different one. When refinancing, you might change your amortization period, switch between fixed and variable rates, or increase the mortgage principal to release cash. This process typically requires re-qualifying for the mortgage, including passing the OSFI stress test, as it's considered a new loan application. There are usually associated costs like legal fees, appraisal fees, and potentially a prepayment penalty if you're breaking your current mortgage term early.
What is a mortgage renewal in Canada?
A mortgage renewal in Canada is the process of extending your existing mortgage agreement with new terms and an interest rate at the end of your current mortgage term. It typically occurs every 1 to 5 years, depending on your chosen term length.
Your lender will usually send you a mortgage renewal statement or offer about 90 to 120 days before your term expires. At this point, you can accept the lender's offer, negotiate for a better rate, or switch to a new lender. Historically, switching lenders at renewal required re-qualification under the OSFI stress test, but a significant change effective November 2024 exempts uninsured mortgage renewals that switch lenders from this stress test, making it easier to shop for better rates without added qualification hurdles. A renewal does not typically allow you to access additional equity without also initiating a refinance.
When should you combine a refinance with a renewal?
You should combine a refinance with a renewal primarily when you need to access home equity or make significant changes to your mortgage structure, and your current mortgage term is ending soon. This timing is ideal because it avoids potential prepayment penalties that you would incur if you refinanced mid-term.
For example, if you plan major home renovations, need to consolidate high-interest debt, or want to fund an investment, performing an equity take-out (refinance) at the same time as your renewal simplifies the process and allows you to potentially secure a better rate on the entire new loan. While a refinance always requires passing the OSFI stress test, aligning it with your renewal means you're already reviewing your mortgage options, making it a natural point to consider these larger financial moves. Remember that any new funds accessed will be added to your mortgage principal, increasing your overall loan amount and potentially your monthly payments.
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What are the financial implications of combining these actions?
Combining a refinance with a renewal can have several significant financial implications, including both potential savings and added costs.
While you avoid prepayment penalties by waiting for your renewal date, you will still incur costs associated with the refinance itself, such as legal fees (typically $800–$1,500), an appraisal fee (often $300–$500), and potentially a new title insurance policy. Your monthly payments will likely increase due to the higher principal amount from accessing equity, even if you secure a lower interest rate on the new total. Additionally, you will need to qualify for the entire new mortgage amount (including the equity take-out) under the OSFI stress test, which currently requires you to qualify at either 5.25% or your contract rate plus 2%, whichever is higher. This could limit the amount of equity you can access, especially if interest rates have risen since your last qualification.
Here's a comparison of typical costs:
| Action | Key Purpose | Common Costs | Stress Test Re-qualification | Equity Access |
|---|---|---|---|---|
| Mortgage Renewal Only | Extend term with new rate | Minimal (appraisal if switching, maybe none) | No (uninsured, switching lenders - Nov 2024) | No (unless pre-approved for small increase) |
| Mortgage Refinance Only (Mid-term) | Access equity, change terms | Prepayment penalty, legal, appraisal | Yes (for all lenders) | Yes |
| Refinance + Renewal (Combined) | Extend term, access equity, optimize terms | Legal, appraisal, new title insurance | Yes (for all lenders) | Yes |
Worked Example: Accessing Equity at Renewal
Consider a scenario where your mortgage is renewing, and you want to consolidate $40,000 in high-interest debt.
Let's say your current mortgage balance is $300,000, and your home is appraised at $600,000. Lenders typically allow you to refinance up to 80% of your home's value, which in this case is $480,000 ($600,000 x 0.80). This means you have potential equity of $180,000 ($480,000 - $300,000) you could access. If you consolidate $40,000 in debt, your new mortgage balance would be $340,000. Suppose you secure a new 5-year fixed rate at 5.50% with a 25-year amortization. Your new monthly payment would be approximately $2,075.
If you had simply renewed your $300,000 mortgage at the same 5.50% rate and 25-year amortization, your payment would be roughly $1,830 per month. The extra $245 per month ($2,075 - $1,830) is the cost of carrying that $40,000 debt through your mortgage, but at a significantly lower interest rate than most credit cards or lines of credit, potentially saving you thousands over the term compared to maintaining separate high-interest debt.
What are the alternatives to a combined refinance and renewal?
If you don't need significant funds or your renewal exemption isn't applicable, several alternatives exist to a combined refinance and renewal.
One option is to simply renew your mortgage with your current lender or switch to a new lender for a better rate, taking advantage of the November 2024 OSFI stress test exemption for uninsured switches. If you need a smaller amount of cash, a Home Equity Line of Credit (HELOC) could be an option, which can be easier to set up than a full refinance and offers flexibility to draw funds as needed. However, HELOC rates are typically variable and tied to the prime rate. For debt consolidation, a personal loan might be an option, though interest rates are usually higher than mortgage rates. Ultimately, the best choice depends on the amount of funds required, your creditworthiness, and your comfort level with different payment structures.
For a personalized assessment of whether a combined refinance and renewal, or an alternative, is best for your unique financial situation, consider using our free renewal review service or trying the YourMortgageRenewalCalculator.com calculator to compare scenarios.
Frequently asked
Can I get a better interest rate by refinancing at renewal?
While you are obtaining a new mortgage, which typically means a new rate, a refinance's primary goal isn't always the lowest rate but rather accessing equity or changing terms. A simple renewal might secure a competitive rate without the added costs and complexities of a full refinance.
Will I have to pay a penalty if I refinance at my renewal date?
No, if you wait until your mortgage's renewal date, you typically will not incur a prepayment penalty from your current lender for refinancing. The term is expiring, so you are free to arrange new financing without penalty, even if it's a refinance.
What is the maximum Loan-to-Value (LTV) for a refinance in Canada?
In Canada, the maximum Loan-to-Value (LTV) for a conventional mortgage refinance is typically 80% of your home's appraised value. This means you must retain at least 20% equity in your home after the refinance is complete.
Do I need a new appraisal if I refinance at renewal?
Yes, almost all lenders will require a new property appraisal when you refinance, even if it's at your renewal date. This is to accurately determine your home's current market value and ensure the Loan-to-Value (LTV) ratio meets their lending criteria for the new, larger mortgage.
Does the OSFI stress test apply to a combined refinance and renewal?
Yes, if you are refinancing (even at renewal), the OSFI stress test will apply to the entire new mortgage amount. This means you must qualify at the greater of 5.25% or your contract rate plus 2%, to ensure you can afford payments at a higher theoretical rate.
Can I increase my amortization period when I refinance at renewal?
Yes, when you refinance, you have the option to reset or extend your amortization period, typically up to 25 or 30 years, depending on the lender and your equity. This can help lower your monthly payments, though it will increase the total interest paid over the life of the loan.
What kind of debt can I consolidate with a refinance at renewal?
You can consolidate various types of high-interest consumer debt, including credit card balances, personal loans, car loans, and unsecured lines of credit, by incorporating them into your new mortgage principal during a refinance at renewal. This typically results in a lower overall interest rate and a single, more manageable monthly payment.
How long does a combined refinance and renewal take?
A combined refinance and renewal process generally takes longer than a simple renewal, typically 3-6 weeks, potentially longer depending on the lender and complexities. This is due to the additional steps like appraisal, legal work, and full underwriting required for a refinance.
Should I work with a mortgage broker for a combined refinance and renewal?
Yes, working with a licensed Canadian mortgage broker is highly recommended for a combined refinance and renewal. They can compare offers from multiple lenders, explain the complex qualification criteria, and guide you through the additional legal and appraisal requirements specific to refinancing.
Is mortgage insurance required for a refinance at renewal?
Mortgage insurance (CMHC, Genworth, Canada Guaranty) is not required if your Loan-to-Value (LTV) ratio remains at or below 80% after the refinance. If you wish to borrow more than 80% of your home's value, it's generally not possible with a refinance, as these are typically uninsured products.