For many of us, our mortgage payment is the largest single expense that leaves our bank account every month. Not only that, these payments typically persist for decades. As a result, the terms of your mortgage play a leading role in your overall financial health.
Fortunately, most borrowers can renew their mortgage every few years. In fact, 3.4 million Canadians are forecast to renew in 2025.
Mortgage renewal is as important as loan origination. It dictates your payments over the coming years. Yet, it is an often underestimated aspect of homeownership in Canada.
Many homeowners face renewal with confusion, urgency, and stress, which can lead to costly errors.
Even the term itself is often misunderstood. Mortgage renewal occurs when your mortgage term ends, allowing you to renew with your current or a different lender under new terms. This stands in contrast to refinancing, which involves paying off your existing mortgage and replacing it with a new one, which can happen at any time during your mortgage term.
This article aims to equip you with the knowledge to confidently navigate the mortgage renewal process, avoid common pitfalls, and, importantly, save money. By dissecting these common mortgage renewal mistakes, you can secure better terms and enhance your financial stability.
Renewal Mistake #1: Waiting too Long
Starting your mortgage renewal process too late can result in rushed decisions and missed opportunities for better rates and terms. Borrowers often delay the renewal process due to busy schedules, procrastination, or a lack of awareness about the renewal timeline.
Early preparation is key to avoiding these issues. Perhaps most importantly, it helps relieve the pressure. Having a long runway to research terms can ease your mind.
Did you know you can start shopping for new rates up to half a year before your renewal date? This gives you plenty of time to research, compare offers, and negotiate with lenders.
Tips for Early Renewal Preparation
- Set Reminders: Mark your calendar around six months before your renewal date.
- Gather Documents Early: Have your financial documents, such as pay stubs, tax returns, and current mortgage statements, ready. Keep everything organized and safe.
- Consult Ahead of Time: Speak with a mortgage professional early to help understand your options.
Renewal Mistake #2: Not Shopping Around
A major mistake borrowers make is not shopping around for better rates. Many assume their current lender will offer the best deal out of loyalty or convenience.
In Canada, a small group of large banks dominates the financial landscape. Many Canadians have had the same bank for as long as they can remember, often the same one their parents used.
Sound familiar?
While you may be loyal to your bank and its friendly branch staff, it's critical to recognize even a slight difference in the rate you pay can materially impact your monthly payments.
Sometimes, it's not even loyalty keeping people with a single bank; it's the nuisance of transferring. Switching banks can be daunting, but the potential savings to endure a minor inconvenience can be worth it.
How to Shop Around Effectively
We can't stress enough how much your mortgage rate affects your overall wealth. For many of us, a house will be by far the largest purchase we ever make in our lives. As a result, it's prudent to focus on obtaining the best interest rate to finance your home.
When shopping around, consider the following:
- Research Online: Use mortgage comparison websites to see current rates.
- Speak with Multiple Lenders: Contact different banks, credit unions, and mortgage brokers for quotes.
- Negotiate: Use the best offers you receive to negotiate better terms with your current lender.
Shopping around can save you tens of thousands of dollars over the life of your mortgage. Put another way, a few hours of work could save you the equivalent of a year's worth of salary; it's that significant.
Rather than tell you, let's show you.
Potential Savings
Imagine a scenario where you own a home in Toronto. Your mortgage term is set to renew in less than half a year. This represents your first mortgage renewal five years into your loan.
At renewal, you still owe $700,000 on your mortgage; Toronto is a costly city, after all.
You decide you want a five-year fixed term, which will be amortized over 20 years. Below are the mock rates you uncovered in this scenario:
| Financial Institution | 5-Year Rate | Monthly Payment | Interest Paid on 5-Year Term |
|---|---|---|---|
| Bank #1 | 7.29% | $5,503.70 | $235,677.75 |
| Bank #2 | 6.99% | $5,381.11 | $225,651.16 |
| Private Lender A | 6.91% | $5,348.62 | $222,980.24 |
| Bank #3 | 5.07% | $4,626.37 | $161,945.89 |
This tells us that, all else equal, it costs $877.33 per month more to obtain a five-year fixed mortgage from Bank #1 (the highest rate on the list) than from Bank #3 (the lowest rate on the list).
Critically, the Bank #3 mortgage would save you $73,731.86 over the five-year term!
Again, that interest savings represents just one term. Over the entire life of this mortgage (multiple terms), the difference in savings would be substantially higher.
Renewal Mistake #3: Only Focusing on Interest Rates
Avoid the common mistake of only focusing on interest rates. While interest rates are crucial, they aren't the only factor to consider when renewing your mortgage. Here are some other considerations:
Term Length: Consider how the term length fits your financial goals or economic outlook. For example, if you plan on moving in two years, a two-year term might be prudent to ensure you don't have to break your agreement part way through. Or, you may expect interest rates to drop substantially in two years, so you want the ability to renew at a cheaper rate.
Flexibility: Look at prepayment options and the ability to make additional payments without penalties. Perhaps your employment situation is likely to change dramatically in the coming years. Flexible prepayment options might be worth pursuing, allowing you to pay off your mortgage faster as your income rises. Here are some standard options offered:
- Lump-Sum Payments: Make a one-time payment annually without penalties.
- Increased Payment Options: Increase your regular payment amount within certain limits.
- Double-Up Payments: Make extra payments on top of your regular payments.
Fees: Be aware of any costs associated with the mortgage. Fees can vary significantly between financial institutions.
Understanding Renewal Options
Renewal options can be overwhelming, but understanding them is crucial for making the best decision.
It's essential to assess your financial situation, risk tolerance, and market trends. Consider consulting with a mortgage professional who can help you understand how each option impacts your finances.
Below you'll find the three main types of mortgage renewal options with their strengths and weaknesses. It's helpful to note that none of the options is inherently better than another. Rather, the best choice depends on your financial circumstances, goals, and general preferences. For example, fixed-rate mortgages offer more predictable payments. If you don't want the anxiety of fluctuating monthly mortgage bills, then a fixed rate option might be best.
Renewal Mistake #4: Skipping Professional Advice
Some borrowers can handle the renewal themselves or want to avoid fees associated with professional advice. However, seeking professional advice can simplify the renewal process and uncover opportunities you might miss. In fact, the cost of professional advice can be far less than the amount they help you save.
Here are some advantages you can gain from collaborating with a mortgage professional:
- Expert Knowledge: Mortgage professionals have up-to-date market knowledge and can provide tailored advice.
- Negotiation Skills: They can negotiate better rates and terms on your behalf.
- Time-Saving: Professionals can handle the paperwork and legwork, saving you time.
- Peace of Mind: Mortgage professionals can offer you peace of mind, knowing your financial future is in the hands of an expert.
Consider Your Goals
Aligning your mortgage renewal with your financial goals ensures your mortgage supports your overall financial plan.
At a high level, here's how to review and adjust your financial goals:
Assess Current Financial Situation: Review your income, expenses, and any changes in your financial circumstances. Consider any further changes you expect over the new term.
Set New Goals: Define what you want to achieve in the following mortgage term, such as lowering debt, saving for a large purchase, or investing. The more precise and actionable the goal, the better.
Align Mortgage Terms: Choose mortgage terms that support these goals, such as flexible payment options for accelerated repayment.
For example, imagine you plan to pay off your mortgage faster. In this scenario, it might make sense to prioritize prepayment privileges and shorter terms.
Again, this is a process that many borrowers find anxiety-inducing; that's normal. If that sounds like you, consider speaking with a mortgage professional.
Renewal Mistake #5: Not Reading the Fine Print
The fine print of your mortgage contract contains critical details that can impact your financial well-being. Of course, the fine print is often tedious or difficult to understand, leading to oversight of important clauses.
Here are some typical items detailed in the fine print:
- Prepayment Penalties: Details the penalties for paying off your mortgage early.
- Renewal Terms: Lists automatic renewal conditions and any changes in terms.
- Fees: Highlights all associated fees and how they are applied.
Overlooking these details can lead to unexpected costs and limited flexibility. Only sign an agreement after fully understanding your contract.
Tips for Reviewing and Understanding Terms
Ask Questions: When you receive your mortgage renewal documents, it's essential to ensure that you understand every term and condition laid out in the contract. Mortgage terms can be complex, with various clauses that could significantly impact your financial situation. A single misunderstanding can lead to unexpected costs, like prepayment penalties you weren't aware existed.
When asking questions, be specific. If required, don't hesitate to request examples, such as asking for a scenario that illustrates how a specific term applies.
Consult a Lawyer: Mortgage contracts can include various terms that may be legally binding and intricate. A real estate lawyer specializes in property law and can help interpret the fine print, ensuring you fully understand your commitments.
Lawyers can sometimes identify potential red flags in your mortgage contract that many borrowers might overlook. Not only that, having a legal professional on your side can provide peace of mind that your aren't mssing critical details that could have long-term consequences..
Take Your Time: Don't rush through the review process; take the time to thoroughly understand all terms.
The mortgage renewal process is a significant financial commitment, and rushing through the review can lead to costly mistakes. Taking your time ensures that you understand every aspect of your renewed mortgage agreement.
Importantly, don't let lenders pressure you into making a quick decision. Making a hasty choice can lock you into unfavorable terms for the duration of the mortgage.
Renewal Mistake #6: Not Considering Penalties and Fees
Understanding all the penalties and fees associated with your mortgage renewal is vital. While interest rates may be the most significant factor, these additional expenses can substantially increase your mortgage cost.
Types of Penalties and Fees
- Early Repayment Penalties: Fees for paying off your mortgage before the term ends.
- Discharge Fees: Costs associated with ending your mortgage.
- Administrative Fees: Charges for processing your renewal.
To help understand your potential costs, request a detailed breakdown of all potential fees from your lender. When comparing offers, calculate the total cost of these fees over your mortgage term.
Strategies to Minimize or Avoid Penalties and Fees
Negotiate: Lenders often have flexibility in their fee structures and are willing to negotiate to retain customers, especially those with good payment histories.
Here are some tips to help you effectively negotiate:
- Research and Prepare: Before negotiating, research current market rates and competitor offers. This gives you leverage by showing that you are informed and have other options.
- Highlight Your Value: Emphasize your loyalty, timely payment history, and any other factors that make you a valuable customer. Lenders want to retain reliable clients.
- Ask for Specific Reductions: Be clear and specific about what you want to be waived or reduced. Remember, a mortgage is more than just interest rates. While lower rates are certainly welcome, consider other creative ways to cut costs, such as requesting reduced appraisal fees.
- Be Ready to Compromise: While you should aim high, be prepared to meet your lender halfway. They may not waive all fees, but a reduction is still beneficial.
Choose Flexible Terms: Flexible mortgage terms can provide you with options that align better with your financial situation and future plans, reducing the likelihood of incurring penalties.
Here's how to select terms that minimize penalty risk:
- Understand Different Terms: Get familiar with terms such as fixed-rate, variable-rate, and hybrid mortgages. Each has its pros and cons regarding penalties and flexibility.
- Consider Shorter Renewal Periods: Shorter terms (e.g., 1-3 years) can provide more frequent opportunities to renegotiate without penalties.
- Look for Portability Options: Some mortgages offer portability, allowing you to transfer the mortgage to a new property without incurring penalties if you move.
- Prepayment Privileges: Choose a mortgage that allows for lump-sum payments or increased monthly payments without penalties. This can help you pay off your mortgage faster and save on interest.
Plan Payments: By carefully planning your payments, you can avoid situations that might incur penalties, such as early repayment penalties or fees for exceeding prepayment limits.
- Know Your Limits: Understand the prepayment limits of your mortgage. Many lenders allow you to pay an extra 10-20% of the principal each year without penalties.
- Set a Prepayment Schedule: If your mortgage allows for prepayments, set a schedule to make regular extra payments within the allowed limits.
- Avoid Large Lump-Sum Payments: Large lump-sum payments might trigger penalties if they exceed your prepayment limits. Spread out extra payments throughout the year instead.
- Plan for Changes: If you anticipate changes in your financial situation (e.g., a bonus or inheritance), plan how to use these funds in a way that minimizes penalties. This might mean waiting until the renewal period to make larger payments. In other words, sometimes less is more.
FAQs Section
Q: What is the difference between mortgage renewal and mortgage refinance?
Mortgage renewal involves repositioning new terms after your current term concludes. On the other hand, mortgage refinancing involves paying off the existing mortgage and replacing it with a new one. A refinance is essentially a breaking of your existing mortgage term.
Q: How early should I start the mortgage renewal process?
Start around six months before your mortgage term ends to ensure you have enough time to research and negotiate the best terms.
Q: Can I negotiate my mortgage renewal terms?
Yes, you can negotiate better rates and terms with your current lender or shop around to find more competitive offers.
Q: What should I consider besides interest rates when renewing my mortgage?
Consider term length, flexibility, prepayment privileges, and associated fees to get a comprehensive view of the mortgage package.
Q: How can a mortgage professional help with the renewal process?
Mortgage professionals offer expert knowledge, negotiation skills, and can save you time by managing the paperwork.
More than that, they offer peace of mind.
Lesser-Known Mortgage Renewal Tips
In addition to the above advice, here are some expert insights and lesser-known tips to help you navigate your mortgage renewal:
Understand Market Trends: Monitor market trends and economic indicators that can impact interest rates. For example, locking in a fixed rate now might be beneficial if you believe the Bank of Canada will raise rates. On the other hand, if you expect rates to drop, a variable rate may be wise. This consideration is particularly relevant since Canada, like many economies, saw its rates surge in recent years. Between January 2022 and August 2023, the prime rate in Canada - a driver and influence on mortgage rates offered by Canadian banks - rose from under 2.5% to over 7%.3
Consider a Blended Rate: Some lenders offer a blended rate, which combines your existing mortgage rate with the current market rate. This can be a good option for avoiding penalties while still benefiting from lower rates.
Evaluate Your Home Equity: Assess the equity in your home before renewal. Increased home equity might qualify you for better rates or terms, as lenders see you as a lower risk.
Be Aware of Special Offers: Lenders often offer special offers or promotions during certain times of the year. Look for these deals, as they can provide additional savings or benefits.
Check Your Credit Score: Your credit health can affect the rates and terms you're offered. Check your credit score and, if needed, enhance it before your mortgage renewal. Here are a few ways you can improve your credit score:
- Pay bills on time.
- Keep credit card balances low relative to your available credit. Aim to use no more than 30% of your available credit.
- Avoid new credit applications.
Diversify your credit types. Lenders prefer borrowers with a mix of debt, like credit cards, auto loans, and mortgages. If signals you can manage different credit types responsibly.
Keep old accounts open since the longer credit history is viewed favourably.
Consider Mortgage Portability: If you plan to move before the end of your mortgage term, consider a mortgage with portability features. These features enable you to transfer your existing mortgage to a new property without penalty, which can save you from hefty fees and administrative costs.
Utilize Online Tools: Many financial institutions and independent websites offer online calculators and tools that can help you estimate your mortgage payments, compare rates, and evaluate different mortgage products. Utilizing these tools can give you a clearer picture of your options and help you make more informed decisions.
Join Financial Literacy Programs: Some community organizations and financial institutions offer free financial literacy programs that cover mortgage basics and other personal finance topics. These programs can improve your understanding of mortgage products and empower you to make more informed decisions during the renewal process. Here are a few examples:
- McGill Personal Finance Essentials (collaboration between RBC and The Globe and Mail)
- Your Financial Toolkit (Government of Canada)
- GetSmarterAboutMoney.ca - Real estate (Ontario Securities Commission)
While intimidating, renewing your mortgage doesn't have to be stressful or confusing. By avoiding common mortgage renewal mistakes, starting early, shopping around, and consulting professionals, you can secure better terms and achieve your financial goals.
Take proactive steps now to ensure a smooth renewal process and a stable financial future.
References
Financial Post. (2024). 3.4 million Canadians to renew mortgages by 2025. Financial Post. Retrieved from https://financialpost.com/news/3-4-million-canadians-renew-mortgages-2025
Financial Consumer Agency of Canada. (2019). Mortgage calculator. Government of Canada. Retrieved from https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MCCalc-CHCalc-eng.aspx
Forbes Advisor. (n.d.). Prime rate history in Canada. Forbes. Retrieved from https://www.forbes.com/advisor/ca/banking/prime-rate-history-canada/
