There are many ways you can save money when you have a renewing mortgage. However, too many of us don’t prepare — leaving us at the mercy of the banks.
In this article, we’ll explain how you can best prepare for the mortgage renewal process, and what you need to know before you meet with your lender!
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Mortgage Renewal Tips: Ask These Questions Before Your Renewal Date
You’re almost there! Time has flown by since you purchased a home. Now you only have a few mortgage payments to go before your current mortgage term reaches its end – making you ask yourself, what happens next?
With just a little bit of prep work, you can save a lot of money over the next term of your mortgage.
But before we find out how…
What Does Renewing a Mortgage Contract Mean?
Although your mortgage likely spans decades, it gets broken down into smaller sections called terms. This is to protect you from the banks by giving you the power to renegotiate the conditions of your mortgage.
When you renew your mortgage, you agree to the conditions of the next term of your mortgage contract.
Bottomline: Mortgage term renewal exists to protect you from the banks. However, if you don’t prepare before meeting your bank, you won’t have the leverage over them to get a better rate.
Here’s What You Need to Know about the Mortgage Renewal Process (…and How You Get the Best Rate!)
So long as your mortgage contract is with a bank or any other federally regulated lenders, they are required by law to contact you with a renewal statement at least 21 days before the end of your current mortgage term.
If you don’t negotiate with them, this mortgage renewal statement is unlikely to be very spectacular for you.
Can You Change Your Payment Frequency to Pay-Off Your Mortgage Sooner?
Potentially. Although most Canadian homeowners have monthly mortgage payments, when you renew your mortgage, you have the opportunity to try a shorter payment frequency.
However, making weekly contributions to your mortgage doesn’t necessarily mean you’ll pay off your mortgage sooner.
Make sure you go with accelerated weekly payments. Otherwise you’ll be paying off your mortgage balance exactly as long as your existing mortgage with monthly payments.
Do You Have to Stick with the Same Lender, or Can You Switch Lenders?
Possibly. If you don’t want to stick with the same lender, you’ll have to pass the financial stress test. This is required by law for anyone that wants to switch lenders.
Since the amount that you owe is less than when you bought your home, and since your income has probably grown since then too, you’re likely to pass the stress test.
Keep in mind that if you switch banks, there may be hidden setup fees involved with transferring your mortgage from one lender to another.
But don’t let that discourage you! After all, rival banks want your business too, and to get it, they may find creative ways to alleviate these fees.
Just make sure to collect each offer in writing. Now you can use the offer as leverage to get an even better deal from other banks. Next you simply rinse and repeat.
Do You Need to Take the Financial Stress Test When You Are Renewing Your Mortgage?
If your income is stagnant or less than when you bought your house, then you probably won’t pass the stress test when renewing your mortgage.
However, you only need to take this test if you switch lenders. If you want to stay with the same lender, then the test isn’t necessary.
Bottomline: Don’t worry. Failing the test doesn’t mean you can’t renew your mortgage. It just means you’ll have to stick with your current lender – and that’s okay.
Although you may not get the best premium, there are still other ways you can save money.
How Soon Can You Renew Your Mortgage in Canada?
Most Canadians break their mortgage into 5-year terms with a fixed interest rate – this means the interest rate will stay the same for the duration of the term.
A shorter term is only better if Canada’s Central Bank reduced their interest rate before the end of the term.
Meanwhile, longer terms are better if the mortgage interest rate is higher at the end of the term. This however also comes at the expense of not being able to renegotiate or switch lenders for a longer period of time.
For the majority of Canadians, breaking up the amortization period of your mortgage renewal contract into 5-year terms offers the best balance of an acceptable interest rate, and the ability to regularly barter for better mortgage options.
Can You Pay off a Mortgage Term Before the End of the Amortization Period?
This depends on the agreement you make with your mortgage lender – so remember to ask your current lender about this if paying your mortgage faster is something you’d be interested in.
With that said, it’s unlikely you’ll be able to get the option to pay the mortgage out in full, although lenders often allow you to increase your payments by an agreed upon percentage, and this could be leveraged to pay off your existing mortgage sooner.
Make sure to ask about any prepayment penalties before you receive your mortgage renewal statement, then you’ll know for sure if you can make a lump sum payment in advance.
Do Mortgage Payments Go down When You Renew?
This depends on the interest rate set by the Central Bank of Canada. If the interest rate is higher at the time of your mortgage renewal than at the beginning of your previous term, then your payments may be higher.
Likewise, if the interest rate is lower, your payments will be lower.
Will the Bank of Canada Lower Their Interest Rate Before Your Renewal Date?
Although purely speculation, it is unlikely interest rates in Canada will be going down any time soon as most national banks in the world are combating inflation by raising their interest rates.
What Will Mortgage Lenders Try to Sell You When You Are Renewing a Mortgage?
Banks are a business. They will absolutely take advantage of you being in the same room as them to sell you one of their products. Spoiler alert, this will likely be mortgage loan insurance.
Here’s the thing, mortgage loan insurance isn’t right for everyone. Furthermore, it has a diminishing value. That’s because it protects your bank’s loan, not your family’s money.
What Banks Will Tell You:
The banks will spin this as a way to protect your mortgage should you be unable to pay it. They will act as though the insurance is something everyone needs, even though that’s not always the case and depends on your financial situation.
What Banks Won’t Tell You:
This insurance will only cover the remaining balance on your mortgage even though the premiums you pay stay the same.
This means you’ll be paying the same amount of money for the entire duration of the insurance even though the value protected by the insurance is getting less and less as you continue to pay down your mortgage.
Bottomline: If you know you need insurance to protect your mortgage, there are better options.
Is There a Better Way to Protect Your Current Mortgage?
Yes! Rather than having diminishing returns on your insurance, you could get insurance that retains its full value for its entire duration.
That means if you’ve insured your mortgage for $500k, and then paid down the remaining balance to 200k, you’d still be insured for 500k.
Now if something were to happen to you, your dependents would not only be able to pay off the remaining balance of your mortgage, but they’d also have an extra 300k to cover any other expenses.
Not to mention, the actual premiums you pay may even be lower than with your mortgage lender, and you can keep your insurance even if you decide to sell your home.
- KEEP READING: The 8 Benefits of Mortgage Life Insurance
Can Your Mortgage Broker Assist You in Renewing Your Mortgage?
Yes! Remember when you first bought your home how your broker shopped around to find you the best rate? They can also do this when you’re renewing!
Even if you stay with your current lender, mortgage brokers can still help you negotiate a much better deal. This is their line of work after-all.
Just make sure to contact them several months before the end of your existing term. That way, they have enough time to negotiate the best deal from the banks.
Is Mortgage Renewing the Same as Refinancing?
No. Renewing a mortgage happens at the end of each mortgage term. Refinancing meanwhile is like starting your mortgage from the beginning for the remaining balance owed.
This is only beneficial if the Bank of Canada has substantially lowered their interest rates during your mortgage term.
Conclusion
Mortgages are broken into smaller terms to give you the power to negotiate better conditions with your bank.
It’s important to do your research and shop around within the few months leading up to your mortgage renewal date.
Make sure that whenever you get an offer from a rival bank, you get a physical copy of that offer. Now you can use the offer as leverage for a better deal from other banks, or even your existing one.
If you can’t shop around, get in touch with your mortgage broker. They’ll be happy to help.
And lastly, be skeptical when your bank offers any additional products. These are designed to protect the banks, not you, and there are much better options available.
If you have any questions about renewing your mortgage, feel free to reach out in the comments! We’d love to hear from you.
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