Your Mortgage Renewal Is it a switch or a refinance?
When your mortgage matures, your goals for your new mortgage will have significant implications. What you plan to do with your mortgage for the next term is really important and your decision will affect your mortgage in the following ways:
- Lender Choice: Not all lenders offer all types of products.
- Mortgage classification: What you choose will determine whether your mortgage is classified as a “Switch” or a “Refinance”.
- Mortgage products: Mortgage features vary with mortgage products from lender to lender.
- Mortgage terms: Mortgage Terms & Conditions vary significantly between products and lenders.
- Mortgage Qualification Criteria: Not all lenders qualify their mortgages the same way.
- Costs associated with the mortgage: The costs associated with your renewal depends on if your mortgage is deemed a refinance or if you don’t have the required income or credit.
- Interest Rate: Under the new mortgage rules the interest rate you are eligible for varies with the classification of your mortgage and few other factors.
At the renewal date, your mortgage is either classified as a “switch” and a “refinance”. Whether it is a switch or refinance, your mortgage broker should be able to arrange your new mortgage for you. It is important that you understand what it means for your mortgage to be a switch or a refinance since it will affect you in the ways explained above.
Under the current mortgage rules, mortgage switches are still back-insurable, but refinances are not. If a mortgage is insurable the lender’s risk is mostly offset by the mortgage insurer. With a refinance, the lender carries the full risk of the mortgage. As with all lending products risk to a lender is expressed to the borrower by way of interest rate. The higher the perceived risk to the lender, the higher the interest rate to the borrower. More details and specifics of rate consequences for the two classifications will be discussed below.
Below is the outlined the criteria for Switches and Refinances:
A mortgage transaction is classified to be a Switch if a borrower either keeps their mortgage with the same lender or moves it to a different lender on the mortgage maturity date without making changes to the mortgage beyond what is allowed by the lender and/or government rules.
For the mortgage to be considered a Switch, at least the following must be true:
- Changes are limited to: “The borrower can only change the interest rate and the term length of the new mortgage whether it is moved to a new lender or kept with the current lender.”
- No extra money can be taken out of the mortgage: Some lenders may allow a small amount to be taken out to cover any minor potential costs etc. e.g. $ 2,000.
- No additions to the current mortgage: While the borrower can choose any term length, no structural changes such as Home Equity Line of Credit (HELOC), or additional mortgages may be added to the current mortgage.
- Amortization continuity: The amortization must continue where it ended at the current term. E.g. If the amortization is 20 years at the end of the existing term, then the amortization must be 20 years at the start of the new term.
- Title and applicants must remain the same: The same people on the current mortgage and Title must remain on the mortgage for the new term.
- The current lender must be deemed eligible by the new lender: Not all lenders will switch mortgages from all their competitors. For example; most A lenders will not switch a mortgage from an alternate lender to an A lender; they will consider it to be a refinance.
- Property Use: Typically, only a mortgage on principal residences and secondary home qualify to be a Switch. Rental property mortgages are deemed Refinances.
- Type of mortgage: The current mortgage must be a “normal” mortgage. Collateral mortgages or combining two or mortgages or Home Equity Lines of Credit etc into one mortgage is deemed to be a Refinance.
- Mortgage Rules: The mortgage must meet all mortgage rules applicable to Switches.
A mortgage is classified to be a Refinance at maturity when the borrower has to renew their mortgage, but also wants to make changes that are disallowed under Switch rules. The following apply to mortgage refinances at maturity whether the mortgage is kept at the existing lender or not:
- Full qualification: The borrower(s) have to fully qualify under current mortgage rules, applicable at the time the mortgage is submitted for approval to the lender, for the new mortgage(s), at new interest rates, terms, conditions etc.
- Equity Out Allowed: Extra money can be taken out of the mortgage for items such as renovations, paying off debt, etc. All lenders have limits to the amount of equity that can be taken out.
- Amortization can be changed: The amortization can be changed to any allowable length which allows the borrower to plan their cash flow for the next mortgage term.
- Title can be changed: A person(s) can be added or removed from Title. Beware of Land Transfer costs if this is planned.
- No penalties: Unlike a refinance done in mid-term, no mortgage penalties are charged for refinances at the maturity date.
- No lawyer required: Unlike for a purchase, a lawyer is usually not required for closing a Refinance mortgage if the property Title is not changed. Other legal services, such as First Canadian Title (FCT) can be used to close the new mortgage at a substantially reduced cost. Your broker will be able to make recommendations for you and also arrange the Refinance closing with FCT if required.
- New Mortgage Rules apply: Since 30 November 2016 the “federal government created new rules that classify refinances as “uninsurable”, which means that lenders can no longer back-insure refinanced with any Canadian mortgage insurer and the lender has to bear the full borrowing risk of the mortgage”
Because of this, the lender transfers the risk as a rate increase to the borrower. Although not substantial, Refinance rates are a little higher than Switch rates.
- Costs associated with Mortgage Refinances: The borrower usually carries the full costs for a refinance.
Although they may vary, the refinancing costs could be:
Legal Fees (FCT): $850.00
Appraisal Costs: $400.00
Discharge Fees: $350.00
The above costs exclude any changes to Title or legal costs incurred by using a lawyer.
Refinance costs can usually be added to the new mortgage if the mortgage, including costs, is not more than 80% of the appraised value of the property.
No matter what type of mortgage you need for your desired future, you should not just let the mortgage rate determine your new mortgage choice, instead treat your mortgage as a planning tool and work with a reputable broker you trust and who puts your interests first.
- New rates & terms: Your mortgage will be renewed at market interest rates, new terms & conditions etc. Since the new mortgage is under a new contract, a lender is under no obligation to offer a borrower similar products, rates, terms or conditions as before.
- You qualify again: If the mortgage is moved to a new lender, the borrower has to fully qualify under new mortgage rules for the new mortgage by proving income, credit etc.
- Insurable Interest Rates: Since mortgage switches are insurable the borrower should be eligible for a discounted mortgage rate without a premium.
- No mortgage penalties: Since the mortgage is renewed on the maturity date the current mortgage contract is not violated so there are no penalties to the borrower.
- Property type, current lender and current mortgage type really matter: Rental properties, mortgages from alternate lenders, collateralized mortgages, and properties with more than one mortgage secured against them (including Home Equity Lines of Credit (HELOC)) don’t qualify for a normal switch; they are always refinanced at maturity.
- Payment history matters: If you have employment problems at the maturity date, but your credit is excellent and you have paid your mortgage on time for the entire term, your existing lender will usually renew your mortgage without verifying income etc. In this case, the borrower should choose the best renewal option and return the renewal agreement to the existing lender for the next term. Without verifiable income, you don’t have the option to switch or refinance your mortgage with a different lender.
- Costs associated with Mortgage Switches: A mortgage Switch is usually free to you, the borrower, except for the lender discharge fees. The new lender usually pays for the legal fees, appraisal etc., minus the discharge fees. Discharge fees usually range between $300 to $400 depending on the existing lender. The discharge fees can be added to the new mortgage without it being classified as a refinance.