Mortgage Renewal Process in Canada – Step by Step Guide


Ashley Tonkens

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Money

When you bought your home, you would have signed a mortgage with an amortization that was probably between 15 and 35 years. However, over the course of that time, the mortgage itself will be broken up into terms that last anywhere from 6 months to 10 years – typically 2 to 5 years.

If your mortgage is up for renewal soon, now is a great time to relearn all those mortgage terms you forgot about after you signed the papers, and hopefully even negotiate a mortgage that will be better suited to your financial needs and goals.

Renewing a mortgage isn’t a difficult process, but it’s good to be prepared for what’s to come in the months leading up to your renewal. This guide will break down every step of the renewal process so you know what to expect, know how to advocate for yourself, and hopefully get the mortgage you need.  

1. Start preparing 120 days before your mortgage matures

Most mortgages come with a prepayment penalty if you try to renew early, but there’s a general rule among lenders that they’ll let you renew 4 months prior to the actual end of the term. Just note that this only applies if you’re renewing your mortgage, and not if you’re switching to a different lender.

Even if your lender doesn’t let you renew early, you can still use this time to assess your situation and goals, research interest rates (fixed vs variable, open vs closed), and mortgage product options, and get yourself into a position to negotiate with your lender when the time comes.

2. Assess your personal finances and circumstances

Depending on how long your original mortgage term was, your life could have changed significantly since you first signed the papers. Maybe you got a better job or struck out on your own as an entrepreneur. Maybe you got married, got divorced, or had kids. Maybe you bought a second house. All of these potential changes could mean your finances look a lot different than they did when you first bought your house, and that means your mortgage needs will have changed too.

Here are some scenarios to consider before it comes time to renew your mortgage:

Budget and income

Your income or budget has increased in the past few years. If so, you might want to consider a mortgage with higher monthly payments, or one that allows for additional payments without penalty.

Your income decreased in the past few years. If that’s the case, you might need to negotiate a mortgage with a longer amortization that will lower the monthly payments.

You recently became self-employed. If your income fluctuates, you’ll likely want a mortgage with a fixed rate so that you always know exactly how much to budget each month.

Expenses

You have more expenses than you did when you first negotiated your mortgage. If so, you might have to decrease your mortgage payments.

You recently had or are having children. Kids will drastically increase your expenses, and you might want a lower mortgage payment that will let you allocate more money to a savings or education fund.

Marital status

You got married recently. Going from a single to a dual income could increase your mortgage budget, and make it easier for you to manage a variable-rate mortgage, a shorter amortization, or a higher payment frequency.

You recently got divorced, or are in the process of separating. If so, it likely means your household budget is much different than it was, so you may need a mortgage with stable payments and a longer amortization.

3. Update your personal and financial goals

Now that you have a better idea of your financial standing, it’s time to take a look at how your personal and financial goals may have changed since you first negotiated your mortgage. 

For example, maybe when you bought your house you were a new graduate with an entry-level job and your main goal was making ends meet. But now, 5 years later, you’ve established yourself professionally, got a few promotions, and your goal has shifted to being mortgage-free by 40. Here are some common goals people have when renewing their mortgage:

  • Paying off the mortgage by a certain date
  • Making renovations to the house
  • Moving to a different house in the next few years
  • Consolidating debts
  • Starting a family
  • Borrowing money in the near future for projects, travel, or other goals

Examining these goals and your current finances will help you decide what kind of mortgage product you need, what kind of budget you have for payments, and what term you might want when you renew.

4. Know your options

Before you renew your mortgage, you’ll have to know what kind of mortgage product you want, and the options to play with that can change your monthly payments and how soon you can be mortgage-free. These are some important terms and options you should be aware of:

Fixed-rate mortgage

The interest rate on a fixed mortgage is locked for the entire term, so you’ll always know exactly how much each payment will be and how much of it is going to the principal and interest About two-thirds of mortgages in Canada are fixed-rate.

Variable-rate mortgage

This is the opposite of a fixed-rate mortgage, and the interest rate will fluctuate with your lender’s prime rate, which is primarily influenced by the policy interest rate set by the Bank of Canada.. Depending on the terms of the mortgage, when the rates change, either your total mortgage payment can fluctuate or your payment will stay the same and the portion paid to interest will vary. If rates increase, more of your payment will go toward the interest. Around one-third of mortgages are variable-rate. 

Related: Compare Fixed vs Variable Mortgages

Open mortgage

An open mortgage can be paid off in part or in full at any time, and the term can be changed at any time without having to pay a penalty. The trade-off for this flexibility tends to be a higher interest rate.

Closed mortgage

Unlike an open mortgage, you can’t make prepayments on a closed mortgage without paying a penalty, and you can’t refinance it before it matures.

Related: Open vs Closed Mortgages

Payment frequency

Many mortgages have monthly payments, but you can also opt for semi-monthly, bi-weekly, and weekly. There are also accelerated options for bi-weekly and weekly payments. In general, the more frequent the payments, the less interest you’ll end up paying over the life of the mortgage.

Amortization

This refers to the total amount of time it will take to pay off the entire mortgage. A shorter amortization means higher payments and less interest paid overall. A longer amortization means lower payments and more interest paid over the life of the mortgage.

5. Start shopping around

Now that you’ve reviewed your situation, goals, and the options, you can start shopping around to see which lenders are offering the products you want.

So where should you look? Start with a mortgage specialist who represents your current lender. After that, reach out to other lenders, mortgage brokers, credit unions, and even private mortgage companies to find out who’s offering the best terms and the best rates.

6. Wait for your renewal notice

About one month before your mortgage matures, your lender will send out a mortgage renewal statement that will include the details of the new mortgage they’re offering, including the:

  • New interest rate
  • Term
  • Payment frequency
  • Principal of the original mortgage at maturity
  • Fees you might have to pay

By the time the renewal statement arrives, you should have a good idea of what you’re looking for in a mortgage, so you’ll know if you want to accept the lender’s terms, negotiate with them, or switch lenders completely.

7. Negotiate with your current lender or switch to a new lender

Now it’s time to decide what mortgage product you want and from which lender.

If the terms offered by your current lender aren’t what you were looking for, you can try to negotiate with them. It’s important to do this before the renewal date, because that will give you time to apply with a different lender if you’re unable to negotiate the terms you want. You can also try using offers from other lenders as leverage to get what you want from your current lender.

Here are the most important aspects to remember:

  • Type of mortgage: choosing the right type could give you more stability, freedom, or flexibility, depending on what you’re looking for
  • Interest rate: getting a lower rate could save you thousands over the term of your mortgage
  • Term: you might want a shorter-term mortgage if you have big changes coming, for instance, or you might want to lock in for the long-term if you’ve found the perfect mortgage
  • Payment frequency: you can increase your payment frequency to reduce individual payments, line them up with your paydays, and increase the amount you pay on the principal each year
  • Amortization: the amortization will determine the amount of your payments and the interest you end up paying over the life of the mortgage

8. Get ready for a mortgage stress test if you switch lenders

As of 2018, any homeowner who switches mortgage providers or gets a new mortgage has to go through a mortgage stress test (check out the Government of Canada’s Mortgage Qualifier Tool). The stress test means that to be approved, you have to qualify for a mortgage with a higher interest rate than the mortgage you want. 

While this can make it harder to get approved for a mortgage, it also ensures that you’ll be able to afford your payments if interest rates increase, and that’s why the government implemented the test.

There are some caveats, however. For one, you can avoid the stress test if you don’t switch providers. If you’re having trouble getting approved with a different lender for your renewal, you can always go back to your original lender.

Also, the stress test only applies to federally regulated lenders like banks, so credit unions and private lenders aren’t required to administer the stress test, though they can still choose to.

To pass the stress test, the lender will look at your income and your total debt service ratio. The higher your income compared to your debts, the better chance you’ll have of passing. If you think you might have trouble passing the mortgage stress test, here are some tips that might help:

  • Avoid applying for any loans prior to renewing your mortgage
  • Pay off other loans and debts, such as credit card debt or car loans
  • Put down a lump sum on your mortgage and apply for a smaller loan

9. Sign the paperwork and pay the fees

The final step in the process of renewing your mortgage is signing the new mortgage contract. If you’re sticking with the original lender, you probably won’t have to pay any additional fees.

But if you’re renewing with a new lender, then there could be additional paperwork, legal costs, and fees you’ll have to budget for. The fees could range from about $1,500 to $2,700. These are the common costs associated with renewing a mortgage:

  • Registration fee
  • Discharging the original mortgage
  • Home appraisal
  • Transfer free
  • Legal or notary fees

Note: A mortgage broker may be willing to use some of their commission to help cover some of these fees in order to make the transition to a new lender smoother.

Conclusion

The actual process of renewing a mortgage is pretty straightforward, and your current lender will send all the paperwork you need and walk you through the different steps. The important thing is to be proactive about your renewal, because this is an ideal time to negotiate a better interest rate, get the term you want, and find a mortgage option that matches your finances and your goals.

Remember to get a head start on planning and research. This will give you lots of time to evaluate your budget and goals, figure out what kind of mortgage you need, and shop around to see what lenders are offering the rates and terms you want.

You can avoid things like additional fees and the mortgage stress test by sticking with your current lender, but it might be worth switching if someone else — like a credit union or private lender — is a better fit for your goals and needs.

What to read next

References

Over to you

We’re interested to know – have you gone through the mortgage renewal process? Did you have to pass the mortgage stress test? Let other homeowners know what the experience was like by sharing your story in the comments below.

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