Mortgage renewals are the bread and butter of home ownership. Not really, but they are EXTREMELY important. Mortgage renewals are a great opportunity to renegotiate the terms of your current contract with the current lender without needing to reapply for financing with another lender. Conditions may include the term length, interest rates, payment frequency, additional charges or fees, etc. To learn more about mortgage renewals in Canada, check out our Mortgage Renewals Guide.
As your mortgage renewal date approaches, it's a great opportunity to re-evaluate your financial plan and future goals. And it's an excellent time to explore your options. You don't have to stay with your existing lender. There is much to consider, like the time frame, plans you may have to modify or renovate your home and, of course, choosing the term and payment that best fits your budget. Let's look at the numbers together.
About six months out from your mortgage renewal your current lender will send you a renewal notice. You could just sign the mortgage renewal and continue with their conditions, but are you getting the best rate and mortgage? In fact, nearly 60% of Canadian borrowers make the mistake of returning the first mortgage renewal offer they receive without shopping around for a better interest rate. In effect, they could be spending hundreds or thousands of dollars more per year! Let me do a quick review to ensure you are getting the best mortgage rate and mortgage to suit your lifestyle and budget.
How long does the mortgage renewal process take?
At a minimum, allocate at least 3-8 weeks to complete the mortgage renewal process. This will ensure that all the paperwork is in place for your next mortgage term. However, beginning the process early will allow your mortgage agent/broker to shop for the best rate and/or negotiate conditions with your current lender. Ideally, you do not want to be stuck with your current lender with a less-than-optimal rate for your next term.
What are the options at the end of a mortgage term?
Generally, there are four options:
1) Pay off the remaining balance (principal)
2) Mortgage renewal
3) Mortgage refinance
4) Your mortgage will likely renew into a new 6-month open term
Suppose you have a 20-year mortgage and are up for renewal at the end of the first five-year term. You have a goal to be debt free, so you choose to option one – to pay off the remaining principal. This means that you owe the bank the principal mortgage amount for years 5-20, NOT the interest you would have paid for years 5-20.
What’s the difference between a mortgage renewal and refinancing?
These two terms are often interchanged, but they are two separate concepts. Mortgage renewals occur once the mortgage term has expired and you sign on to another term with your current lender. Contrastingly, refinancing is the process of breaking your current contract to enter a new contract with either the same or a different lender. Refinancing can occur at the end of a term or during your current term. However, if you choose to refinance during your current contract, there may be associated penalties.
Think of mortgage renewals like a subscription streaming service. For example, you currently use Netflix for all your home entertainment, binge-watching fun! You have a plan that renews monthly. One week before the plan is about to renew, you weigh the pros and cons of switching to Disney+ and discontinuing the Netflix membership. Netflix continues to give you great options, but you want to see what else is out there.
1) Staying with Netflix is like a mortgage renewal. You stay with your current provider for another term because you like the services and options they provide.
2) Switching to Disney+ is like refinancing your mortgage. You’ve weighed out your options and hope to obtain something better (i.e., different shows or better interest rates).
Your mortgage renewal date is a fresh start and if there’s another private mortgage lender who can provide something that better suits your needs for the next term, I’ll find it. There is an assumption that you should just renew, but take the time to review all your options.
Mortgage rates can be volatile in nature. If mortgage rates are about to rise, the media will speculate on what is going to happen giving us all a little warning. Even if those warnings don’t cross your path, I am here to check in and evaluate your current mortgage and see whether it's time for an early mortgage renewal.
How early can you renew your mortgage?
The answer is dependent on the conditions of your current lender. Typically, your current mortgage lender will send you a renewal slip 30 days before your mortgage term’s maturity date (expiration). To optimize the renewal process, you can usually start negotiating 90 to 120 days before your term’s maturity date. In effect, many lenders will not make you pay a prepayment penalty.
What is the penalty for renewing your mortgage early?
Depending on the type of mortgage you have, you may incur a penalty if you decide to break your mortgage early. This penalty is usually three months' interest at your current rate or the interest rate differential—which is calculated using the current rate, the new rate, and the remaining months left in your mortgage term. However, in some cases when rates are about to go up, it can make sense to break the mortgage terms and secure the current rate.
Don’t take risks with your most valuable asset. If change is in the air, let me crunch the numbers, find you the right mortgage and make sure it’s the right financial fit for you.
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