How Does a Mortgage Renewal Work in 2024?
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Discover the methodologyFor most Canadians, their homes are not only the places they live but are also their largest financial assets, so it is no surprise that navigating the mortgage renewal process can be intimidating.
To make an informed decision on which provider to go with, it is important to have the right information at your fingertips.
We've compiled a guide about mortgage renewals and how to go about them. Whether you're coming to the end of your term or just want to understand the basics, here is the info you’ll need to navigate the mortgage renewal landscape effectively.
What is a mortgage renewal?
A mortgage renewal is the process of renewing your existing mortgage with your existing lender or a new lender, usually a federally regulated institution such as a bank. In Canada, this typically occurs when your current mortgage term is about to expire and you have yet to have paid off the entire balance. The lending body is obliged to notify you at least 21 days before the end of your existing term, either offering you a renewal or specifying that they will not do so. According to Canadian law, a renewal statement must include the following information.
- The term
- The payment frequency
- The interest rate
- The remaining principal or balance at the date of renewal
- Any additional fees or charges that may apply
- A specification that the interest rate will not increase until your renewal
Most terms can last anywhere from a few months to five years or longer. The majority of people take several terms to pay off their mortgages in full.
When the time for a renewal comes, it may be possible to get a better mortgage rate. Depending on the market and mortgage options available, some lenders may be offering cheaper rates than your current mortgage. If you’re lucky, there may also be some insurance benefits or other perks from the lender.
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Why do I need to renew my mortgage?
Because you have taken out a loan and your status as the owner of your house is dependent upon you making payments towards your mortgage. It is essential to stay up to date on your mortgage terms in order to guarantee that you are getting the best deal possible. Renewing your mortgage can also be an opportunity to secure a lower interest rate, access cheaper insurance or take advantage of add-ons and/or discounts.
Let's look at an example:
Good to know
Janet lives in Toronto where she has a fixed-rate mortgage with a 7% interest rate for a term of three years. When the housing market in the city skyrockets and interest rates tumble, she notes that it makes sense for her to renew her mortgage with a new lender that has variable-rate mortgages. She only has three more years before she has paid out the balance in full and is inheriting money from a deceased uncle, so it looks like a good opportunity to save money. If interest rates go up, she knows she has enough capital to make her payments. She knows she can afford the rates doing so and furthermore, is about to own an expensive asset in full.
What happens if I don't renew my mortgage?
If you haven’t paid the full balance and moreover, stop doing so by not renewing your mortgage, you could find yourself having to sell your house. That is why it is so important to remain on top of renewing your mortgage. If you still have principal left to pay and you don’t renew, you could compromise your homeownership. If however, you have paid the balance of your principal, then there is no need to worry about renewals because the house your debt has been repaid in full. You should not entertain unless you have absolutely no other option or have paid your mortgage out in full.
What are the different kinds of mortgages?
There are several different types of mortgages available in the Canadian marketplace. These include fixed-rate mortgages, variable-rate mortgages and cash-back mortgages.
For a detailed description of each, see the table below:
| Type | About |
|---|---|
| Fixed Rate Mortgages | A fixed-rate mortgage is a mortgage with a fixed interest rate for the entire loan term. This type of mortgage offers the stability and predictability of knowing that your payments will remain the same throughout the term of the loan. The main disadvantage of this type of mortgage is that if interest rates decrease during your loan period, you will not benefit from lower payments. |
| Variable Rate Mortgages | A variable-rate mortgage is a loan with an interest rate that can change over time. This type of loan offers the potential to benefit from lower interest rates if the rates go down during your loan period. However, if rates go up, your payments will increase as well. |
| Cash Back Mortgages | A cash-back mortgage is a loan where you receive a lump sum at the beginning of your loan term. This type of loan allows you to benefit from an immediate influx of cash that you can use for home improvements or other purchases. The downside is that the amount of money you receive is likely to be much less than what you would pay in total interest over the course of the loan. |
What are the best mortgage rates in the market?
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How early can I renew my mortgage?
It depends on your mortgage term, which can be anything from a couple of months to five years and more. You can also break your mortgage whenever you like; however, you will probably have to pay a series of fees. In most cases though, it is recommended to look into renewing your mortgage at least four months before your current mortgage term is due to end. Mortgage renewal can be a stressful process, and it's important to start shopping for a new mortgage with enough time to review all your options and get the best deal possible. Four months is also the period when most lenders will allow you to begin the renewal process.
When shopping for a new mortgage, here are some factors you might want to keep in mind:
- How much is your current mortgage rate and what’s your budget?
- Is your financial situation likely to change in the coming months and years?
- What payment frequency makes the most sense for you?
- What kind of fees and penalties are associated with breaking your current mortgage?
- What is the length of time you'd like your new mortgage to be for?
- The type of mortgage you'd prefer (fixed or variable)?
- Are there any special features you want included in your new mortgage?
- What is your credit score and the interest rate you can expect to get?
Do mortgage payments go down when you renew?
That depends on the market, the kind of mortgage you have obtained as well as your history of having made payments in the past – but in most cases, yes. This is because the principal you have to pay off is less, and as a result, you stand less of a risk of defaulting on your payments to a lender. In theory, this should make you eligible for lower interest rates on your payments for both variable and fixed-rate mortgages. In a worst-case scenario where the market has undergone shocks due to some form of financial crisis and interest rates have gone up, you may find yourself having to pay larger monthly fees on a smaller principal.
How much does it cost to break a mortgage?
It depends on your lender — but breaking your mortgage before the end of its term can be expensive. In most cases, the fee will consist of 3 months of interest on your remaining principal at the current interest rate.
Let's review an example
For example
James is a contractor living and working in Winnipeg. He decides to break his mortgage with his current bank because interest rates have dropped and he would like to obtain a variable-rate mortgage with another lender. His current policy has $100,000 remaining in principal and he still has to pay it off with a fixed-rate mortgage at 4 %. As a result, the fee he has to pay in order to break his mortgage comes to $12,000.
Before breaking a mortgage, consumers should consider their current financial situation, their desired timeline for repayment and the associated costs. Generally, it is wise to try to complete the full term in order to get the most out of the original agreement. If, however, you need to break your mortgage early for any reason, you may have to pay a prepayment penalty as well as discharge fees and other associated costs. The amount of the prepayment penalty will depend on your lender and the type of mortgage you have, so it is important to do your research and compare different options to find the best solution available.
How should I compare mortgages?
When it comes to mortgages in Canada, the marketplace is not just complex but also very competitive. It can seem daunting, but it doesn’t have to be. It’s important to take into account a few key metrics when comparing mortgages. The most important factors to consider include the interest rate, the type of mortgage (fixed or variable rate) and the amortization period. It’s also important to pay attention to the amount of fees charged by lenders and brokers, as well as any additional charges that might be applied in order to get a cheap rate. It is often beneficial to opt for a lender who offers discounts on closing costs and other associated costs. Finally, while shopping around for a mortgage, always review your credit score and credit history to ensure that you are getting the best rate available.
Additional variables that may have an impact on a consumer include:
- Prepayment options
- Lock-in periods
- Tax deductions
- Payment flexibility
- Cashback options
- Bank relationships
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What kind of mortgage should I choose?
It depends on your needs as well as your constraints. When making a choice as important as this, there are several factors to consider. If you have a strong credit history, you might prefer a fixed-rate mortgage. This allows you to lock in an interest rate for the life of the loan, ensuring that your monthly payment will remain consistent. A variable-rate mortgage may be a better option if you are looking to save money in the long run, as interest rates can fluctuate, but you expose yourself to the risk of them going up and your payments increasing.
In addition to the kind of rate, you should also take into account how much you are able to pay each month and whether there are additional costs or any prepayment privileges. If you are coming into money through inheritance or otherwise, this is all the more important because the sooner you’ve paid the balance on your mortgage, the less interest you have to pay over the long term.
What is the cheapest kind of mortgage renewal?
The cheapest kind of mortgage will depend on your individual circumstances and the state of the wider market. If you have a good credit rating and can qualify for the best rates, a fixed-rate mortgage might be the most prudent option because you will be able to obtain a lower interest rate for the term of the loan, and know exactly what your payments will be each month. On the other hand, if you think interest rates may go down in the future, you may want to consider a variable-rate mortgage. At signing, variable-rate mortgages are usually cheaper than fixed-rate mortgages, but the interest rate can change with market conditions. If you're willing to take the risk, a variable-rate mortgage could save you money in the long run.
One other thing to take into consideration is that switching mortgage providers often involves a set of fees. There are usually four different types, so watch out for them:
- An appraisal fee of the value of your property, usually in the region of $150 to $500
- A discharge fee can range from $5 to $400
- An assignment fee of $25 to $300
- Legal fees, usually of up to $1,500
Do mortgage payments go down when you renew?
They might, but it is not certain. Interest rates fluctuate with the market, and specifically, the lender's ability to borrow. You may receive a better interest rate or a worse rate. This is, unfortunately, a fact of life when it comes to mortgage renewals. There is little you can do about it.
You can certainly find the very best rate possible by comparing lenders online, but if rates are higher than when you took your first mortgage, you will be paying more. Remember, you can start comparing rates and locking in a competitive fixed rate up to 120 days before renewal.
How do I know if I'm getting a good deal on my renewal?
By comparing. Compare between different providers, between you and your friends and family, as well as the general market and wider economy. It is essential that you look at different mortgage options to get an idea of the lay of the land, the rate, the fees associated with the mortgage, and other special offers such as cash-back incentives or lower interest rates. Compare different lenders to get an idea of the best deal available.
Another thing, it is essential that you read all of the terms and conditions of the renewal, including any penalties for early repayment. No one likes a surprise, so pay close attention to any fees associated with the renewal, including application fees, appraisal fees, and prepayment penalties. Talk to a licensed provider to make sure you are not paying more than necessary.
Expert advice
And one final tip: don’t be afraid to negotiate. Ask your lender for a better rate or for any special offers they may have. It can never hurt!
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