If you’re a Canadian homeowner nearing the end of your mortgage term and still owe money on your home, you’ll need to renew for another term with your current lender – or switch to a different lender.
Let’s take a deeper look at how mortgage renewal works, discuss your options and review some useful tips for a successful renewal.
What Is A Mortgage Renewal?
Mortgage renewal is the process of securing a new mortgage contract at the end of your term with your current lender.
At the end of a given term, your remaining principal balance is technically due to the lender. That’s why most Canadians renew their mortgage several times over the course of their amortization period, which is the estimated time it will take to repay the mortgage altogether.
Mortgage terms last anywhere from a few months to 5 years, sometimes longer. The number and frequency of your renewals will depend on the term lengths you choose along the way.
For example, if you have a 25-year amortization period, you might renew your mortgage 5 or more times before you repay it in full.
A mortgage renewal will typically come with a change in your interest rate and options regarding the length of your next term. When renewing, you may also have the option to change your loan type or payment frequency.
Mortgage Renewal Vs. Switching
During your renewal period, you may choose to transfer your mortgage to another lender through what’s known as “switching.”
Some homeowners may switch in order to get a mortgage product not offered by their current lender. Others may switch to a lender with a better customer experience. Much more commonly, though, people switch in order to secure a better interest rate. We’ll get into more specifics on how to negotiate interest rates later on.
Be aware that switching will likely result in fees. For starters, your current lender will charge you a discharge fee of up to around $400 – plus a prepayment penalty if you switch outside of their renewal window. Your new lender may also charge setup costs, which can include an appraisal fee, assignment fee and legal fees. These can cost you up to $500, $300 and $1,500, respectively.
Before switching lenders, make sure the perceived value translates into actual financial sense. If the new rate being offered is close to what you can get at your current lender, transferring the mortgage might not be your best option. It wouldn’t be worth saving a couple of hundred dollars in interest if it costs you over $1,000 in setup fees to switch lenders.
Mortgage Renewal Vs. Refinancing
A mortgage renewal isn’t the same as a mortgage refinance.
Put simply, a renewal is the extension or renegotiation of an existing mortgage contract during a specific renewal period set by your lender.
A mortgage refinance is the process of replacing your current mortgage with a new one, which allows you to make more significant changes to your mortgage than a renewal would. These changes can include modifying your title, increasing the mortgage amount to pay off debt or convert your equity into cash, and extending your amortization.
Refinancing typically involves more cost to the borrower than a renewal – especially if you break your mortgage contract in order to refinance in the middle of a term. If you break your contract to refinance, you’ll likely pay a mortgage prepayment penalty, mortgage discharge fee, legal fees and other expenses. If you refinance when your current contract reaches maturity, you may face fewer expenses.
With both a renewal and a refinance, a borrower can make changes to their interest rate, term length and loan type. However, you can’t take equity out of your home or change your amortization period with a mortgage renewal. For that, you would need to refinance.
How The Mortgage Renewal Process Works
As your mortgage nears maturity, your lender will notify you in writing of your renewal options. If you deal with a bank that’s federally regulated, they must notify you at least 21 days prior to the end of the current mortgage term. Most financial institutions will reach out much earlier than this. Usually, you’ll have the option to renew up to 120 days (or around 4 months) early without penalty.
When you receive your mortgage renewal statement, you’ll be presented with a series of current rates, term options and potentially different mortgage products to choose from (for example, open and closed mortgage options). Once you make your renewal selection, you’ll return the document to the lender for processing. If you choose to switch lenders instead of renewing, you’ll need to meet the new lender’s application requirements, which could involve taking the mortgage stress test again.
Negotiating Your Mortgage Renewal
You don’t have to just accept the rate presented to you. In fact, you may want to contact your lender to see if they can offer you an even better rate than what appears in your renewal statement. Some borrowers contact multiple lenders and present competing offers to their current lender as a way of working toward the best interest rate possible.
It may also be helpful to work with a mortgage broker, who can present you with options from multiple lenders during a single meeting.
What Is Early Mortgage Renewal?
An early mortgage renewal refers to the renewing of a mortgage before the end of its current term, or what’s referred to as the renewal cycle, which often begins 30 days prior to maturity. As mentioned, most mortgage lenders will allow you to renew your mortgage without a penalty as many as 120 days prior to maturity. Your early renewal options may vary depending on your lender’s policies.
Some lenders send early renewal offers with interest rates that may be lower than their posted rates. From the lender’s perspective, this incentive helps to secure a customer’s business for an additional mortgage term. From your perspective, this lower rate could help you save money on interest. Just remember that you may be able to negotiate your way into an even better rate.
Generally speaking, if the newly offered mortgage rates are lower than what you currently have, renewing early can be an attractive option. It allows you to lock in early at a better rate. But if those rates are higher than what you’re paying, you may be better off waiting to renew – unless you feel that rates may be on the rise in the near future.
What To Consider When You Renew A Mortgage
Before you renew your mortgage, take time to consider your future plans to ensure that your mortgage meets your needs both today and down the road. There’s more to a mortgage than just getting the best interest rate.
Here’s a list of questions you should ask yourself when preparing for renewal:
- How long do you plan to live in your home?
- Are there any major purchases on the horizon, such as a home renovation or a new vehicle?
- When do you hope to pay off your mortgage? Could you benefit from having more prepayment flexibility?
- Is your mortgage protected with critical illness or life insurance? If not, is it something you’d like to add?
- How has your experience been with your current lender?
- What interest rate are you able to secure elsewhere? Is your current lender able to match?
Answering these questions will better prepare you to make the right decisions when it comes time to renew.
What Happens If You Don’t Renew Your Mortgage?
If you don’t sign your mortgage renewal prior to the maturity date, your financial institution may decide to automatically renew your mortgage into an open term, potentially resulting in a much higher interest rate being charged. The mortgage renewal statement from your current lender will say whether your mortgage will automatically renew.
Although you can get out of an open mortgage at any time, you’ll have to wait at least 30 days for your new rate to take effect at the beginning of the following month. Depending on the size of your mortgage, this could mean paying hundreds of dollars in additional interest.
Some lenders will also renew clients into a closed fixed-rate mortgage if they don’t renew in time. It can cause issues when you want to switch out, though, because you will then be charged a penalty to do so.
What Happens If Your Mortgage Renewal Is Denied?
If you haven’t made payments as agreed over the term of your mortgage, your mortgage lender may decide not to renew your mortgage.
Even if you’ve made your mortgage payments on time, your lender will review your credit report before renewal to discern your current financial situation. If they see credit activity that places you at increased risk of defaulting on your mortgage, they may still decide not to renew. This is yet another reason why it’s so important to stay on top of your mortgage payments and maintain a clean credit report.
If you’re unable to renew your mortgage with your current lender or switch, your choices may be limited to speaking with a private lender or selling your home. This could be a good time to reach out to a broker to review alternative lending options.
The Bottom Line: Be Prepared For Your Mortgage Renewal
When it’s time to renew your mortgage, the best thing you can do is be prepared. Start early and take time to figure out your future plans. Ask yourself how you can best align your mortgage to meet your goals.
When you decide that you’re ready to renew, you can use a broker to shop around and find the best rate. If you find a lower rate, make sure that going through the process makes sense for your future home goals before taking action.
Ready to renew your mortgage or switch lenders? Get started today with Rocket Mortgage Canada, UL (Rocket Mortgage™).