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A How-To Guide on Mortgage Renewals

Tips for Finding the Best Mortgage Before It’s Time for Renewal

Often, when a mortgage term is up, many Canadians automatically renew instead of looking for a better deal. Ottawa mortgages are no different, as renewal often seems like an easier option.

If your financial situation has changed, you might want to look at your options. You could have a higher income, or you may now live in a dual-income household.

On the other hand, you might have greater financial responsibilities, like children or care costs for other family members.

There is a good chance that your mortgage might not be the best fit for your current situation. So, instead of automatically renewing your mortgage, consider shopping around for the best deal. Speak with a Mortgage Broker!

You could reduce your monthly mortgage payment (which is helpful if you have other major expenses). Or you could pay down your mortgage faster by freeing up more capital.

If you’re not sure whether you should stick with your current lender, consider these tips for finding the best mortgage available for you.

Consider Your Financial Goals

Before signing a mortgage renewal, go over your financial goals and consider whether the mortgage renewal suits your goals.

If the mortgage renewal is for a five-year fixed-rate, do you plan to stay in your current home for the next five years? Or are you planning to sell soon? If you want to downsize, sell, and move somewhere else, consider shopping for a shorter mortgage term—such as a three-year term.

Your financial situation may be different than it was when you applied for your mortgage several years ago. If you have a higher income, you may want a mortgage with better prepayment options so you can pay off your mortgage sooner and save on interest charges.

You may want to change your payment frequency depending on your income and goals, e.g. switching from monthly to bi-weekly payments to pay off your mortgage quicker. Or if you’re looking to eliminate high-interest debt, you may want to increase the mortgage loan to consolidate high-interest debt.

Other upcoming financial goals may include investments, home renovation projects, and paying for your kid’s tuition for the next four-plus years. So, consider these costs when choosing a mortgage product.

Renewing Doesn’t Always Mean Spending More

If you decide to switch your mortgage to a new lender at renewal time, this shouldn’t cost you any money out of pocket. While there will likely be a discharge fee from your current lender, this fee can be absorbed by your new lender into your mortgage. And new lenders will usually pick up any appraisal and legal costs as well.

Consider the Stress Test and Your Current Financial Standing

As of January 1, 2018, all Canadians are subject to the mortgage stress test when buying a new home, applying for a new mortgage, or switching to a new federally-regulated lender during mortgage renewal. Private lenders can choose to use the stress test, as well. But they are not obligated to.

In order to pass the stress test, you need to prove that you can afford monthly mortgage payments at an interest rate that is higher than your actual mortgage rate. This test ensures that you can still afford your mortgage payments if interest rates rise in the future.

With this test, lenders look at your total debt service ratio—the amount of income that goes toward all your monthly debt payments. So, if a large portion of your income goes toward paying debts, then you may not be able to afford higher mortgage interest payments.

But if you have an income to handle debt payments and high mortgage payments, you should be able to pass the stress test if you choose to switch to a new lender.

How Brokers Help You

Mortgage brokers can help you shop for, compare, and negotiate mortgage products, ensuring you get the best mortgage.

A mortgage broker will go over different mortgage options to find the one best suited to your needs. They use your budget to plan out different mortgage products and give you choices.

Mortgage brokers can certainly find the best deals for you amongst the various lenders in the city and help you make an informed decision. They can also determine the competitiveness of your renewal offer while figuring out if you can pass the mortgage stress test when switching lenders.

Start Shopping Early

Since you don’t have to stick with the same mortgage lender when renewing your mortgage, you can shop around to find the best mortgage terms and conditions that suit your current financial situation.

But don’t wait until the very end of your mortgage term to start shopping with your mortgage broker. Instead, start shopping four to six months before your mortgage term ends. Starting early will give you enough time to compare different mortgage options, find the best mortgage for you, and secure it.

Lenders will often offer a guaranteed discounted rate, but only for a specific period of time. If you secure this rate in time, then you won’t have to worry about rates rising. And if the rates go down during this time, then you can renegotiate your mortgage for a lower rate.

Compare Lenders

Have your mortgage broker show you various financing options to see if there is a mortgage option with terms and conditions that suit your needs. Collect competing offers and see if a new lender is willing to absorb most of the start-up costs for switching lenders.

Look at the mortgage rates of various financial institutions to see if they are better than your current mortgage. For help with comparing different options from various lenders, consult with a mortgage broker.

Don’t Be Afraid to Make a Switch

Some lenders might try to scare you out of switching your mortgage to a new lender by charging you hefty discharge fees. But if switching to a new lender means you’ll have a better rate and flexibility, then it’s worth it to make the switch. Plus, most lenders will absorb the discharge fee into the new mortgage, which is a small price to pay for a better mortgage.

Negotiate

You can negotiate with your current lender for a lower interest rate than what is quoted in your renewal letter. A lender’s posted rate is never the lowest rate, and there is usually room to negotiate and talk the number down. So don’t be afraid to negotiate.

If you are happy with your current mortgage lender because they have the best advice, policies, and mortgage features, ask them if they will match a competitor’s lower rate, rate type (fixed or variable), and amortization period. Often, they will want to keep you on as a loyal customer and be willing to negotiate. Plus, it never hurts to ask!

If you’re not comfortable with asking, or your current lender won’t negotiate, a mortgage broker can do it for you. They’ll get comparisons with many different lenders, too. People tend to pay less on their mortgages when they go through a mortgage broker. They also pay less on interest and often have less restrictive mortgages.

Low Rates Don’t Always Mean the Best Rates

Before signing for the lowest interest rate, always read the fine print and ask the lender what penalties come with opting for the lowest rate. The penalties may mean this low rate isn’t the best rate for you. For example, you could be giving up your freedom to make extra payments to pay down your mortgage faster. And there might be steep penalties for breaking a mortgage early.

While you can ask for the best rate available on the market, it is often wise to compare the penalties from different lenders if you have to move and sell your home before your mortgage term is finished.

Life is unpredictable, and circumstances can arise that will make you have to sell your home and relocate. That’s why it’s good to be prepared with a manageable mortgage and avoid the high costs of breaking a mortgage, especially if you have a collateral charge mortgage.

These mortgages are often non-transferable, so if you need to move before your term is up, you will probably have to pay off your mortgage before you can take out a new one.

Decide on a Fixed or Variable Rate

Variable rates are typically lower than fixed interest rates, so they are often ideal if you can stomach rate fluctuation during your term. The variable rate mortgage is also generally a more flexible product because the penalty to get out of the contract is typically 3 months of interest.

While fixed rates tend to be higher than variable rates, their consistency provides peace of mind if mortgage rates go up. And if you need to renew your mortgage within 120 days (4 months), and you find a fixed rate that works for you, you can lock-in a fixed rate up to 4 months in advance.

5 Tips for Renewing a Mortgage

Keep these tips in mind when it’s time to renew your mortgage:

  1. Do Not Sign the Auto-Renew Letter, Speak To Someone and Negotiate First

If you sign the renewal letter, you are giving up your ability to negotiate with the lender. And if you don’t contact your lender, your mortgage may automatically be renewed for another term, and you may not get the best interest rates and conditions.

So, contact your lender or mortgage broker first to negotiate for a better mortgage product.

  1. Pick a Lender You Are Comfortable Remaining With Long Term (Stress Test Makes It Difficult To Change Lenders)

When it’s time to renew your mortgage, you won’t need to pass a stress test if you stick with the same lender. But you may need to if you switch lenders, which can make switching lenders difficult for some borrowers.

So, when shopping around for mortgages, make sure you find a lender you’ll be happy to stay with in the long run. Consider the lender’s reputation, rates, penalties, and flexibility regarding pre-payments.

  1. Mind Your Credit Score, the Rates You’re Offered Are Risk-Based

Since mortgage interest rates are based on a borrower’s credit score, try to maintain a good credit score so you can qualify for lower interest rates. Make payments on time and avoid excessive debt to appear low-risk to lenders.

  1. Wait to Apply For a Loan until After You Pass the Stress Test

Having other debts can make it harder to pass the stress test. And if you fail the stress test, you may not be able to switch lenders for a better rate. So if you need to apply for a loan, wait until after you pass the stress test and renew your mortgage.

  1. Pay off Your Loans before Renewing Your Mortgage (Less Debt Means Less Risk Means Better Rate)

Paying off high-interest debts and loans will help improve your credit score. As a result, you will appear low-risk to lenders and qualify for better interest rates. Paying off debt also helps improve your ability to pass the mortgage stress test.

So, if you are planning to pay off any loans, do so before it’s time to renew your mortgage—preferably, at least two months before.

The Bottom Line

You have options when it comes to renewing your mortgage. While it’s easy to renew your mortgage automatically, you may not be getting the best deal out there for your unique financial situation.

So, remember to give yourself (and your mortgage broker) ample time to compare mortgages before your current mortgage term is up. The more time you have to compare and negotiate mortgage products, the more likely you and your mortgage broker will find the best mortgage for you amongst the many Ottawa mortgages available on the market.

Mortgage brokers work for you to find the best mortgage suited to your situation and make sure you are prepared for life’s unexpected turns in the road.

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