Home mortgages in Canada are actually not normally paid off over the life of the term. This is because, usually, lenders amortize the loan for a period between 15 and 30 years. However, the longest allowable loan you can receive from a Canadian bank is for ten years.
The result is that many homeowners who pursue financing through the traditional channels will have to renew their mortgage at least once. However, some homeowners prefer to refinance at the end of their loan deal, rather than renewing the loan. It’s important to understand the difference between renewing and refinancing.
The Difference Between Renewing and Refinancing
A renewal of a mortgage is pretty straightforward. At the end of a five or ten year deal, if the loan has still not been fully paid off, you can opt to simply renew the deal and pay off the loan at the previously agreed upon rate.
Refinancing is different. Refinancing essentially means that you are swapping your current mortgage deal for a different one. And you don’t have to do this just at the end of a loan period, you can apply for refinancing at any time.
When is it Best to Refinance?
Refinancing can be appealing for people in a number of scenarios. For instance, let’s say that you took out your loan at a point in time when rates were higher than they are now. Naturally, you would want to take advantage of the current lower rate. If you are paying 5.5 percent interest on your mortgage and you still have three years to go, you may want to refinance for the maximum length, especially if you don’t expect to pay it off early.
Locking in a low rate now for the next ten years might mean you must take a closed mortgage (which means that you pay a penalty for early payment). However, if you make more money over the next ten years, you can put it in a savings account and earn interest on it. Many analysts believe that interest rates are about to increase, and locking in now could be a wise decision.
Refinancing can also be a good move when you have several other debts at high interest levels, such as credit card debt. Refinancing with a longer mortgage repayment plan will allow you to pay off the credit card debt faster.
For more information, please don’t hesitate to contact us.