Homeownership is an exciting milestone, however; it does come with its fair share of new terminology, legal requirements, and added responsibilities. You likely know that you have a renewal date for your mortgage, though you may be less familiar with what renewing entails, how it will affect you, and what other options are available.
Having a lawyer work with you during your renewal or refinance can make the process easier and ensure you get the best possible terms. At Howard Nightingale Professional Corporation, we pride ourselves on guiding our clients to the most favourable renewal and refinancing scenario for their lifestyle.
Renewing vs. Refinancing Your Mortgage in Ontario
Renewing
When you buy a home with a mortgage, you enter an agreement with the lender. They loan you the funds to pay for the home over and above your down payment, and you repay that loan over time. Mortgage terms are usually between one and five years, with longer terms available at higher interest rates.
At the end of this term, you can choose to pay out or pay down the balance on your mortgage, or more likely, you renew with your current lender for another term under new parameters. You will have paid down a portion of the principal on your home, so when you renew, the amount of your mortgage will tend to go down. Your interest rate may change, as well as your monthly payment.
Renewal can be done up to a set number of days or months before the expiration of your mortgage. If you wish to renew or sell your home before your renewal date or pay off the balance of your mortgage early, you may incur additional fees called penalties.
Refinancing
Refinancing might sound like it should be similar, and in some ways it is. The biggest difference is that refinancing a mortgage is an owner-initiated process typically used to accomplish a specific goal, such as reducing monthly expenses, accessing better interest rates, or renovating.
Owners who are refinancing their home often choose to consolidate other debts with higher interest rates. They may also refinance to use equity generated by paying down the mortgage principal as a down payment to purchase another property.
Another reason for refinancing could be a divorce or breakup where one party is keeping the house. That person will need to qualify to hold the mortgage on their own.
Refinancing can be done during a renewal, or it may be a separate conversation with your lender, in which case you may also be subject to penalties.
Do You Need a Lawyer to Renew or Refinance?
The short answer is no. The long answer is that it can be helpful for many reasons and even required in some cases.
During your initial purchase, lawyers most likely managed the paperwork and the transfer of funds in conjunction with your realtor and mortgage specialist. With a renewal or refinancing, your lawyer can advise you on the best scenario for your situation and outline what you should know and what to avoid during the process.
They also can:
- Review and explain documents
- Handle paperwork
- Liaise or negotiate with the lender or broker on your behalf
What Increasing Interest Rates Mean for Your Renewal or Refinance
80% of all mortgages in Canada are up for renewal in the next 5 years, with many of them happening in 2024. High interest rates mean that for the first time in decades, renewing a mortgage may not reduce monthly payments. This could be a struggle for many homeowners.
A renewal may not be an option for some, who may choose to sell and purchase a lower-priced home. This may be to manage their budget, or because they cannot qualify for the same home with interest rates resulting in potential payment increases of over 50%.
Refinancing could be a saving grace for some owners. Those with credit card or other debt may choose to consolidate into one single payment versus managing several smaller debt obligations and multiple interest rates. Refinancing this way is a great option when thinking of how to optimize your monthly cash flow.
Interest rates also affect your possible penalties when renewing or refinancing before your term ends. Many penalties are a percentage of the interest a lender expects to receive, calculated from the principal owing. So, opting for a mortgage with accelerated payments or an annual lump sum contribution allows you to pay down your principal faster to reduce penalties.
Three Reasons You May Want to Refinance Instead of Renew
- Improve Cash Flow – There are a few ways to free up room in your monthly finances. You might choose to pay off credit cards or loans. Fewer payments and lower interest rates can make budgeting much easier. You may also refinance before making other purchases that require financing, like a vehicle so you can qualify more easily.
- Renovations and Improvements – Renovating can add substantial value to your property but also requires capital. Maybe you are ready for a new interior, or your aging home is due for a facelift. Perhaps you are adding a suite or a garage. Refinancing can give you the funds for your remodel.
- Access Your Equity – Your home’s value will likely increase with the market the longer you own it. As you pay your monthly payments and your principal goes down over time, this will result in equity you can take out as cash to use as a down payment on additional property or other large purchases. If your mortgage amount is less than 80% of the home’s value, you may be able to refinance up to that 80% mark without proof of purpose for the funds.
When You Need a Lawyer for Refinancing
One scenario in which you will need a lawyer is if you opt for a refinance plus improvements mortgage or renovation mortgage. This type of refinancing requires you to collect quotes from qualified trades for submission with your application. The renovation cost still must fall within your maximum approval amount.
From here, the additional funds will usually be released to your lawyer, who will disburse them to the contractors upon completion of work and a satisfactory appraisal. Should the work be unsatisfactory, your lawyer will be able to protect your interests and your money.
Another benefit to having a lawyer handling the renovation finances is that they may be able to help you negotiate a waiver of deposits with contractors, saving you from having to come up with cash upfront to complete your project.
Contact Us If You Are Renewing Your Mortgage or Refinancing Your Home
We are happy to answer questions and help you navigate the intricacies of homeownership so you can get back to enjoying your house, financially stress-free. Contact Howard Nightingale Professional Corporation to get started at our Toronto office at 416-663-4423 or toll-free at 1-877- 224-8225.
Your information will always remain private and confidential.