Mortgage terms sound like a foreign language to most people. All the talk about LTV, GDS/TDS, rental offset, conventional, insurable, debt servicing and stress-tests, is enough to make your head spin; or maybe put you to sleep! Some may have a bit of knowledge of them, but not enough to feel confident explaining them to someone. Two terms that home owners should be aware of are refinance, and renew. All borrowers will undoubtedly renew at some point, and refinancing will be a part of a lot of home owners’ experience as well. The terms may seem quite similar and thought of as the same, but they’re not. Let me give you some insight as to how they are different.
A mortgage renewal occurs when the term of the mortgage is coming to an end. Whether it’s the most common term, which is 5 years, or another term length, it has come to the point where another term length needs to be set with the lender. In addition to setting a new term, the borrower has to get a new rate for their mortgage. If rates have gone up since the start of their last term they will have to bite the bullet and take the higher rate. If rates have gone down, they can celebrate their fortune and will benefit from the lower rate for the duration of their new term.
The process is pretty simple for a mortgage renewal. There are no documents to submit, no income to validate, no lawyers to visit, as long as you stay with the same lender. However, if you decide to shop around for a better rate, then the process becomes a little more involved. If you find a better rate with another lender you have the ability to switch, or transfer, your mortgage over to them. There is no pre-payment penalty owed to your lender since the term has expired. Any fees that may be involved in the transfer, like lawyer fees, are usually covered by the new lender. With a new lender however, you will have to “requalify” for the mortgage. That means that you will need to provide them with income documents and have your credit checked again. The reason for the requalification is that they have no idea of your financial situation, so need to make sure you are able to maintain mortgage payments.
Now let’s get to a mortgage refinance. When you refinance your mortgage, you are changing your mortgage in some way. Any increase in the amount, or adjustment to the amortization, will qualify as a refinance or your mortgage. Its usually done when someone wants to access equity in their property to do things like pay off some debts. For instance, it could be something like credit card debt, or student loans. Or it may be to use for investments like mutual funds, stocks and bonds. Or they may want to use it as a down payment to buy another property. Whatever the case, changes are being made and a requalification is required. Even if you were to refinance with the same lender, you would still need to requalify for the new mortgage.
As I mentioned earlier, you have to go through the process of qualifying just like you did when you acquired the mortgage. Income documents must be verified, liabilities must be checked and a current credit score must be obtained. If you have gotten a new job, or accumulated a large amount of debts, that can affect your ability to qualify. Lenders like to see 2 years history at a job. So getting a new job isn’t advantageous. Also, if you bought a new car or borrowed to pay for your child’s education, your liabilities may be out of wack for qualifying as well. However, if you received a promotion at work, and have reduced your debt amounts, then obviously qualifying will be a much simpler process. You will have to consider your current circumstances before deciding what you want, or are able, to do.
The term is not a factor with a refinance, except in regards to the penalty. You can refinance at any point during the term of your mortgage. However depending on when during your term you decide to refinance, it will impact the amount of your penalty. If you break the mortgage at or near the beginning of the term on a fixed rate mortgage, the penalty will be higher than it would at the end. It’s different with a variable rate mortgage where the penalty is 3 months interest, which I discuss more in-depth in another blog. So there is another factor to consider in making your financing decision.
You are now equipped with the basic knowledge of these terms; refinance and renew. Feel free to contact me to translate more mortgage terms and help you gain more understanding or the mortgage world.