When a mortgage term is coming to an end, borrowers often consider whether to renew with their current lender, refinance, or move the mortgage to a new lender. Although those options are often discussed together, they are not the same, and the legal process can differ depending on the type of transaction.
Mortgage renewal, refinancing, and switching lenders: what is the difference?
A mortgage renewal usually means the borrower is staying with the same lender at the end of the mortgage term and entering into a new term. In many cases, the main issues are the new interest rate, term length, and payment structure.
A refinance usually involves changing the mortgage in a more significant way. That may include increasing the loan amount, restructuring the debt, changing the amortization, or using the property equity for another purpose.
Switching lenders usually means the existing mortgage is being paid out and replaced by a mortgage from a new lender. In some cases, a switch may also be part of a refinance, but not always.
These distinctions matter because the legal work involved is not always the same.
When is a lawyer usually involved?
A simple renewal with the same lender may be relatively straightforward and may not involve the same legal process as a refinance or lender switch.
Refinancing or switching lenders will often require a lawyer. This is because the transaction may involve reviewing lender instructions, searching title, obtaining payout information, preparing and signing mortgage documents, paying out an existing mortgage, and registering a new mortgage on title.
Even where the transaction seems routine from the borrower’s perspective, there may still be legal and title-related steps that have to be completed before closing.
What happens if a borrower switches lenders?
If a borrower is moving the mortgage to a new lender, the existing mortgage will usually need to be paid out. The new lender’s mortgage will then need to be registered against title.
As part of that process, a lawyer will often:
- review the new lender’s instructions;
- search title to confirm ownership and review registered interests;
- request a payout statement from the current lender;
- prepare the mortgage documents for signing;
- arrange for payout of the existing mortgage; and
- register the new mortgage on title.
The prior mortgage will also need to be discharged from title, although there can be a delay between payout and registration of the discharge.
What happens on a refinance?
A refinance can take different forms, but it usually involves more than simply accepting a new term at maturity. For example, the borrower may be increasing the mortgage amount, consolidating other debt, changing mortgage terms, or arranging new financing with the same lender or a different one.
From a legal perspective, the work may be similar to a lender switch, especially if a new mortgage has to be registered or an existing mortgage has to be paid out. The exact process will depend on the structure of the transaction and the lender’s requirements.
Practical issues borrowers should consider
Borrowers often focus first on the interest rate, but that is only part of the picture. Depending on the transaction, there may also be:
- payout penalties or discharge fees;
- legal fees and other closing costs;
- changes to payment amounts or loan structure;
- new mortgage terms that should be reviewed carefully;
- title or document issues that affect timing; and
- delays if instructions or supporting documents are not received early enough.
For that reason, it is usually worth looking at the overall cost and structure of the transaction, not only the advertised rate.
Timing matters
One practical issue that comes up often is timing. Borrowers sometimes start looking at refinancing or switching lenders close to the maturity date, assuming the process will be quick.
In some cases it is. In others, delays can arise because payout statements are not received promptly, lender instructions arrive late, title issues have to be reviewed, or signing has to be arranged on short notice. Starting early can make the process easier to manage.
Final thoughts
Renewing, refinancing, and switching lenders are related, but they are not interchangeable. A straightforward renewal with the same lender may involve a different process from a refinance or a move to a new lender, particularly where title, payout, and registration steps are involved.
Hummingbird Lawyers assists clients across Toronto and the GTA with mortgage refinancing, lender switches, private mortgages, and related real estate financing matters.
