Renewal

Renewal is a form of extending an unpaid loan in which the remaining balance is carried over, or renewed, into a new loan at the start of the next financing period, usually with revised terms such as a new interest rate reflecting current market conditions. It is distinct from a full refinancing in some markets, where renewal specifically refers to continuing the relationship with the same lender under an updated agreement at the loan's maturity, rather than taking out a loan with a different lender through a fresh application process.

Renewal is especially common with mortgages in countries such as Canada, where many home loans carry a fixed rate for a term, such as five years, that is shorter than the full amortization period of twenty-five or thirty years, requiring the borrower to renew into a new rate at the end of each shorter term until the loan is fully repaid over its much longer overall life.

If your loan's interest rate is only locked in for a few years but the loan itself takes decades to pay off, renewal is what happens at the end of each locked-in period: the remaining balance rolls over into a new term at whatever rate is then on offer, rather than the loan simply ending or requiring the borrower to find an entirely new source of financing.

• Renewal typically happens automatically at the natural end of a loan term, often with the same lender, without requiring a full new credit application or underwriting.
• Refinancing is an active choice to replace the loan, often with a different lender, and usually involves a fresh underwriting and closing process from start to finish.
• Renewal terms are usually simpler to negotiate but give the borrower less leverage to shop for better rates than a full refinance process would provide.

At renewal, borrowers are generally free to negotiate the new rate, switch to a different rate type such as fixed or variable, or move the loan to another lender entirely if the existing lender's renewal offer is not competitive. Comparing the renewal offer against the wider market can reveal worthwhile savings, since lenders sometimes offer existing customers a less competitive rate than they would offer a new customer shopping around for the first time, betting that inertia will keep the existing customer from actually switching.

Missing a renewal deadline can sometimes result in the loan automatically rolling onto a lender's standard, often considerably higher, rate rather than a genuinely negotiated one, which is why borrowers are generally advised to begin reviewing renewal options well before the current term actually expires. Lenders are often required to notify borrowers a set number of weeks or months ahead of a renewal date specifically to give them adequate time to shop around rather than being forced into whatever default terms the lender happens to offer at the last moment.

Moving a loan to a new lender at renewal can involve legal and administrative fees, a new appraisal if the lender requires one, and sometimes a discharge fee charged by the existing lender for releasing their security interest in the property. These switching costs need to be weighed against the rate improvement on offer, since a marginally better rate from a new lender can be entirely offset, or even made worse overall, by the one-time costs involved in actually making the move, particularly for borrowers with a smaller remaining loan balance.

Outside residential mortgages, renewal is also common in short-term business lending, where a working capital facility or trade finance line is extended, or renewed, at the end of its term rather than being fully repaid and reapplied for from scratch. Lenders in this context typically reassess the borrowing business's financial position at each renewal, meaning a company's access to continued financing can tighten quickly if its trading performance has deteriorated since the facility was last renewed.