How to Renew Your Mortgage
When your mortgage term is nearing its expiration, you will need to renew it for a new term if there is still a balance remaining on it. The mortgage renewal process provides you with an opportunity to reassess your current mortgage product in relation to your financial standing and goals.
This article will tell you what to expect during the mortgage renewal process and what you can do to ensure your next mortgage product is properly tailored to address your needs.
Consider your options
Your lender will send you a mortgage renewal notice before the expiry of your term. The earliest this can happen is at least four months before the mortgage matures, which allows you to begin the renewal process.
The mortgage renewal notice often includes a contract that you can easily sign and return to your lender. Some lenders will even auto-renew your mortgage if you have not yet paid off the principal amount. But before you sign that contract, consider your options.
Take some time to review your current financial situation. Has it experienced any change from the time when you first signed your mortgage contract to now? Many things can change during your mortgage term. You might be better or worse off financially from the time your term began. For example, you or your spouse might have begun or ended jobs or added to your family. These changes can also impact the type of mortgage product you have; it may no longer be suitable as a result.
Your financial status also impacts the renewal of your mortgage. If you are making your payments on time, maintain a good credit score and are gainfully employed, the path to mortgage renewal will be much easier. Some lenders automatically renew their clients’ mortgages based on their positive financial habits. However, if the reverse is true – that is, you are unemployed, late making your payments and have a poor credit score – you may face an uphill battle.
If your financial situation has changed for the worse, the lender may decline to renew your mortgage. They will inform you of their decision beforehand. Should that happen, you will want to explore alternative options to renew your mortgage before the term is up.
A mortgage broker can help you shop around to see what other lenders are offering and determine whether or not you would qualify for a better mortgage rate. If you’re not feeling confident about submitting a new mortgage application due to changes to your financial situation, it might be worth contacting your existing lender to ask if they would be willing to provide you with a better rate.
In the event that you decide to switch lenders due to a more competitive mortgage product or rejection from your previous lender, bear in mind that a new lender will require you to submit a new mortgage application. The lender may also have you pass a mortgage stress test. The stress test assesses your ability to afford making mortgage payments at a higher interest rate.
If your mortgage is uninsured – meaning your down payment was 20% or more – the minimum qualifying rate for the stress test will either be the Bank of Canada’s five-year benchmark rate – 5.34% as of this writing – or the rate offered by your lender plus 2%; whichever is higher.
For example, if your lender’s rate is 3.25%, the Bank of Canada’s benchmark rate of 5.34% will apply to the stress test. But, if after you make your 20% down payment, the lender offers a rate of 3.35%, the stress test will use that rate plus 2%, or 5.35%.
Define your goals and needs
Many changes can occur throughout the term of your mortgage. You might change jobs, get promoted, become unemployed, start a family or even retire. All of these situations can have an impact on your financial goals. If you plan to move or have already done so, that should also be included in your financial goals. All of these elements and situations are vital when you’re renewing your mortgage.
When you examine or reconsider your financial goals during the mortgage renewal process, you should take some time to make a list and determine what your ideal mortgage product would be. Consider the following questions:
- Will you or your spouse be receiving any additional money that could be put toward paying off your mortgage anytime soon? This includes non-repayable gifts from family members, pay bonuses from work or proceeds from the sale of property or other assets.
- Does your budget allow for an increase to your mortgage payments?
- Will you need to refinance to consolidate other higher interest debts? If so, be sure to familiarize yourself with your lender’s rules for refinancing; contact them for additional details.
- During your mortgage term, will you be selling your home or moving?
- Will you be able to completely pay off the remaining balance of your mortgage during your term? If so, be sure to check the prepayment penalties associated with your mortgage product, or opt for an open mortgage.
Get ready to renew
Your lender is required to send you a mortgage renewal notice at least 21 days (three weeks) before the expiry of your mortgage term. This notice often includes a mortgage renewal contract with an offer that you can sign and return to them. The renewal offer will include the lender’s lowest posted mortgage rate, and is valid for 30 days before the term ends. It’s important to note that by sending you this offer, you will not be subject to any rate increases during that 30-day period.
During this period, you can meet with your lender to discuss the offer and attempt to negotiate a better rate than the one offered. The rate sent with mortgage renewal contract is often not competitive; however, you can attempt to negotiate a better one with the lender directly.
By now, you should have had ample opportunity to shop around and see what’s available on the market while comparing competitors’ rates to that of your lender. This may give you a good bargaining chip later on. At this point, you should schedule a meeting with your mortgage broker to find out what other lenders would be willing to offer you.
Decision time
Once you’ve had a chance to shop around, meet with your broker, set or modify your financial goals, determine your needs and consider your lender’s mortgage renewal rate, and it’s time to make a decision. But before you do, consider your financial situation, personal needs and job status and ask yourself this question: “Does my mortgage still fit with my needs, or is it time for a change?”
If you think it’s time for a change, you should meet with your current lender first to discuss the renewal rate they initially sent you. You can accept the offer if you wish, but keep in mind that the lender’s rate is usually not very competitive. Meeting with your lender allows you to discuss the rate and possibly negotiate a better one. Some lenders are willing to match the rate of a competitor; if they do not, you are free to switch lenders if you choose.
While there are no penalties associated with switching lenders, you will be required to pay other fees. Some fees that you might be required to pay if you chose to switch mortgage lenders might include:
- Legal fees
- Property Appraisal fee
- Mortgage Discharge fee
- Mortgage Assignment fee
In some cases, some lenders and brokers may offer to cover some or all of these fees for you when the switch is made. In the event that your new lender is unwilling to do so, you will be required to cover these costs yourself.
If you decide to switch lenders, you will be required to submit a new mortgage application, as the new lender’s lending criteria may differ from those of your previous lender.
Refinancing your mortgage
Some homeowners want to refinance their mortgage. When you refinance a mortgage, you are essentially replacing your existing mortgage loan with a new one.
When you refinance your mortgage, you can access up to 80% of the value of your home, minus any outstanding mortgages. The money obtained can be used for various purposes, including paying off your mortgage.
Top reasons why you might refinance your mortgage:
- To take advantage of lower interest rates
- To gain access to equity in your home
- Debt consolidation
The 3 ways to refinance your mortgage:
- Blend and extend your mortgage. The lender may offer a blended rate consisting of your current mortgage rate plus any other money borrowed at present market rates.
- Break your mortgage contract with your current lender. This would be your option if you are looking for a lower interest rate or to get access to equity from your home. You are essentially cancelling your mortgage contract early and taking on a new one with a different lender. Bear in mind that if you do break your contract, the lender will charge you a penalty.
- Get a home equity line of credit (HELOC). This line of credit allows you access to the equity in your home and can be obtained via your current lender and a few others. With a HELOC, you must make monthly interest-only payments on the remaining balance.
Conclusion
The mortgage renewal process has many steps and can seem complex at times. But if you do your homework, properly assess your financial situation and maintain regular contact with your mortgage broker, you will gain some bargaining power and ultimately lock in a mortgage product that aligns with your needs.
