A Simple Guide to Understanding Mortgage Renewals in Canada
DO NOT JUST SIGN ON THE DOTTED LINE WHEN YOUR MORTGAGE RENEWS!
When you mortgage comes up for renewal, your existing lender will most likely not offer their best terms upfront. They will send you a renewal letter in the mail, or sometimes call you with their offer. In most of these cases, they will be fairly aggressive and say things like “this rate expires by the end of the day” in order to create urgency in hopes that you sign asap.
If you get this letter or this phone call – your next call should be to me. Let me explain:
The basics – What is a mortgage renewal?
Mortgage renewals are the bread and butter of home ownership. Not really, but they are SUPER SUPER important. Mortgage renewals are a great opportunity to renegotiate the terms of your current mortgage contract. Conditions may include the term length, interest rates, payment frequency, additional charges or fees, etc.
Loan terms and amortization are often interchangeably referenced. However, they are two separate topics. A term refers to the length of your mortgage agreement – i.e., the contract duration with your current mortgage lender. Most commonly, terms are five years, and their expiration is referred to as a maturity date. Amortization refers to the period it will take to pay off a mortgage in full. This varies based on the individual but is usually between 15 – 30 years.
When your mortgage comes to its maturity date, you MUST renew your mortgage into a new term. This new term can be with the same lender or you can move to a new lender that is offering better terms.
What’s the difference between a mortgage renewal and refinancing?
These two terms are interchanged often, but they are two separate concepts. Mortgage renewals occur once the mortgage term has expired, and you sign on to another term. Typically, things like your amortization stay the same if you were to just renew your mortgage. If you have 15 years remaining on your amortization at renewal, then your mortgage renewal will also have 15 years remaining.
Contrastingly, refinancing is the process of restructuring your mortgage. You can refinance your mortgage in the middle of your term (which will trigger an early payout penalty) OR you can refinance your mortgage on your maturity date. Here are some of the reasons someone might refinance or restructure their mortgage:
- Equity take out. You are allowed to take out up to 80% of the value of your home. You can use this money for whatever you want – renovations, investing, replenish savings, etc.
- Increase amortization. By increasing your amortization you can effectively lower your monthly payment to increase your cashflow.
- Adding or removing a borrower on the mortgage. By restructuring your mortgage, you can remove another borrower. For example, if your parents helped you co-sign for your home, you can use this opportunity to remove them from the mortgage.
- Getting a better rate. Sometimes it is beneficial to break your mortgage term early – pay the penalty – and take a lower mortgage rate.
When can I start the renewal process?
Typically, your current mortgage lender will send you a renewal slip 30 days before your mortgage term’s maturity date (expiration). Some lenders even reach out up to 6 months prior to renewal. To optimize the renewal process, you should start the renewal process 120 days before your term’s maturity date.
120 days gives us enough time to find the best rate and product that fits your current and future mortgage needs.
What are the options at the end of a mortgage term?
Generally, there are three options:
1) Pay off the remaining balance (principal). You would do this if you have enough savings to do this, sold your home, or received a gift.
2) Renew with your existing lender
3) Transfer your mortgage to a new lender with better rates and terms.
Whichever option you choose, you need to insure you have a mortgage broker help you determine what is best for you. I have helped countless clients renew their mortgage – sometimes it makes the most sense to stay with your current lender, and sometimes it makes more sense to switch to a new lender that is offering better terms.
Don’t just sign on the dotted line when your current lender tell you to. You are going to leave a lot of money on the table. Call me – let me help!