A mortgage renewal is the perfect opportunity to align homeownership with future financial goals and current budget constraints. So, preparing for a mortgage renewal a few weeks or even a few months before your mortgage contract ends is best.
Start with a call to your current lender and ask what you can expect in a renewal offer. Then, start to examine what the competition can offer.
Whether you select a variable or fixed-rate mortgage, you can find a mortgage contract that fits your finance and money goals by comparing payment frequency, loan terms, and mortgage rates.
“It takes less effort to renew with your current lender,” explains Jesse Abrams, founder and CEO of Homewise, a national digital homeownership platform. “But seeing what other lenders offer could save you a lot of money.”
For example, on a $500,000 mortgage, a 50 basis point increase in the mortgage rate could cost you approximately $1,675 extra per year (assuming a 20-year amortization).
As Abrams points out: “An hour of your time can save you thousands, so it’s worth it.”
To find the best mortgage renewal contract, you need to be clear about what’s changed and what could change.
“Interest rates are likely higher than when you first bought your home,” explains Carissa Lucreziano, vice president of Financial and Investment Advice at CIBC. “When looking to renew your mortgage, it’s important to take a step back and look at your ambitions over the next five years.”
Everyone wants the best rate with some assurances, explains Abrams, but ignoring life circumstances can result in missed savings or higher fees.
Do you plan to switch jobs? Move neighbourhoods? Start a family or create a multi-generation home? All these life events will impact your living arrangements. To avoid high fees associated with breaking a mortgage, you must consider pre-payment privileges and flexibility, not just the best rate.
For instance, if you predict that you may end up moving to a new property before the end of a fixed term, it may be better to pick a mortgage with more flexibility. For instance, a shorter loan term, a variable-rate mortgage, or a mortgage that offers portability — where you can move the mortgage to a new property — all offer greater flexibility while avoiding potentially high fees associated with breaking a mortgage. “This is where an independent mortgage broker who works with multiple lenders can really help,” explains Abrams.
For those facing a steep increase in the cost of living, it may be wise to consider ways to minimize how much your monthly mortgage payment could increase.
One option is to extend your amortization period when it comes time to renew your mortgage. A longer amortization results in smaller monthly payments — making your mortgage loan more affordable, at least in the short term.
Re-amortizing can be risky as it increases your overall interest costs on the loan. Still, when used strategically, re-amortizing can help you manage your current housing costs and keep you on track to meet your financial goals.
Until recently, any borrower renewing with a new lender would have to requalify using the mortgage stress test. However, a December 2023 announcement by the federal government suggests borrowers with existing mortgages can skip the stress test to requalify for a mortgage, even if renewing with a new lender.
This is good news for anyone facing a mortgage renewal as it prompts more competition among lenders — forcing lenders to lower rates to attract mortgage renewal business.
These changes are expected to take effect once the 2024 federal budget is passed. For more clarification, be sure to ask your mortgage broker.
The content provided on Myfinancesguru.com is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.
