When obtaining a mortgage from a lender, you sign a contract that lasts for a set period of time. This is referred to as the mortgage term, which can last anywhere from a few months to five years or more. Unless you pay the mortgage in full, you will need to renew mortgage once the term is over.
Whether you are looking to renew your mortgage after five years or are in a time crunch and need to make a decision in a matter of days, here is everything you need to know about mortgage renewals in Canada.
What is Renewing a Mortgage in Canada and Why Should You Do It?
If you are unable to pay off your mortgage at the end of your term, you’ll need to renew it. Your mortgage contract will be renewed, however the term and interest rate could possibly change
When your mortgage is up for renewal, you should take advantage of any incentives that your lender provides, such as mortgage prepayment allowances, better rates or changing into a fixed or variable mortgage. Or you can work with other lenders to see if you can achieve better terms.
Mortgage renewal gives you the opportunity to have a better mortgage repayment situation and often times can provide borrowers with considerably lower rates than their original mortgage. If you are facing difficulties repaying your mortgage within its term then renewing your mortgage in Canada can help.
How Do You Renew A Mortgage in Canada?
Your mortgage can be renewed once your term expires. This is when the lender will take a look at your mortgage contract and repayment details before choosing to draft a new renewal contract.
The contract outlines the mortgage’s terms and conditions, including your interest rate, the type of mortgage rate you have (fixed or variable), and any expenses associated with the contract, such as prepayment penalties, in certain instances.
It’s pretty simple to renew your mortgage with the same lender if you’ve paid all of your payments on time. Your lender will simply send you the renewal contracts and ask you to sign them.
However, if you choose to shop around for a better deal you need to first talk to several lenders and then meet their requirements to qualify for a mortgage renewal.
When Can You Renew Your Mortgage?
When your mortgage term expires, your mortgage lender will send you a renewal statement. This statement will be sent to you at least 3-6 months before the end of your mortgage term.
This statement will include information on your mortgage, including the balance, term length, and interest rate. This is the interest rate for your next term that they are providing you. This proposed interest rate may increase within 30 days of your maturity date, depending on your lender.
However, if you choose to work with a different lender for your renewal it is best to start shopping around several months before your term ends. Borrowers should ideally look for rates and terms, four or five months before their mortgage is due for renewal. You can then choose to renew your mortgage anywhere between 30 to 60 days of your mortgage expiration.
Automatic Mortgage Renewals
Some lenders provide automatic renewals, which implies that if you don’t take action, your mortgage will be automatically renewed. If your mortgage will be automatically renewed, it will be shown on your renewal statement.
Automatic renewals imply that you agree to the conditions and prices offered by your lender, which may not suit your current needs. This is why it is important to check with your lender before your term ends to ensure they do not have any automatic mortgage renewals in place.
Early Renew Mortgages
All of Canada’s leading banks provide an early mortgage renewal option that allows you to renew your mortgage without penalty 120 days (four months) before your term finishes. You can renew 150 days early (five months) with CIBC, and 180 days (six months) early with Scotiabank.
If you renew your mortgage within this time frame, there is no penalty for doing it early. However, switching lenders or renewing your mortgage before the offered early renewal period of your current lender may result in mortgage prepayment penalties.
The Risk Rate Associated With Approval for a Mortgage Renewal
Since mortgage renewals are not secured, you may be denied one. Your mortgage lender may decide not to renew your mortgage if your financial condition has worsened, such as if you have been late on prior mortgage payments, lost your job, or now have a much worse credit score.
Approximately 3% of mortgage renewals are refused. The acceptance percentage for same-lender refinancing is considerably lower, with 18.6% of applicants being denied.
Requirements for a Mortgage Renewal in Canada
When it comes to mortgage renewal, borrowers have two options: they can either work with a new lender or stick with their current lender. The requirements for a mortgage renewal heavily depend on which option a borrower chooses.
Working With a New Lender For Mortgage Renewal
Switching lenders involves filing a new mortgage application. The new lender’s approval requirements may differ from your previous one. You should also factor in the cost of switching, which may include a property appraisal, setup fees (such as discharge, certification, transfer, or reassignment fees), and any other administrative costs.
These fees vary by province, but the mortgage discharge fee is generally between $200 and $350, and the re-registration fee is around $70. Legal fees could be an issue, however, check with your new lender to see if they will cover any of these costs. Because you are switching to them, they will sometimes cover some costs as a good-faith gesture.
Switching lenders near the end of your term is less expensive than breaking your mortgage contract in the middle of it.
You will have to pay a prepayment penalty if you choose to break a closed mortgage before the term ends. If you pay off your full mortgage before the end of a term (even when you sell your house), or if you pay more than your contract permits, you will be charged a prepayment fee. Thousands of dollars can be spent on prepayment fees.
A prepayment penalty will not apply if you have an open mortgage, but in many circumstances, the entire cost of moving lenders will outweigh any benefit or savings you would obtain from a new lender.
Working With Your Current Lender for a Mortgage Renewal
It’s a good idea to renegotiate your interest rate when you renew your mortgage term with the same lender, especially if interest rates have dropped. If you renegotiate, however, ask what all the fees and charges will be, since they will explain how they calculate these prices.
Some lenders offer a blend-and-extend option, which allows you to renegotiate your interest rate before the end of your loan term. By combining the new lower interest rate with the old one, you can prolong your existing term at a lower rate.
If your lender is willing to match the offers of competing lenders in order to keep your mortgage, you may be able to receive a higher interest rate or more favourable terms in your mortgage contract. If you employ this strategy, be prepared to provide any documentation your lender might ask for.
The Stress Test
Borrowers who plan to apply for a new mortgage are subjected to a stress test. This is why you do not need to pass a stress test if you plan to renew your mortgage with your current lender. Since you are replacing your previous mortgage with a new mortgage, refinancing or switching lenders is considered applying for a new mortgage.
Whether you’re renewing with the same lender or not, it’s still important to clear the mortgage stress test. The goal of the stress test is to see if you can afford your mortgage. If you can’t afford your mortgage comfortably, you could face major financial problems.
Borrowers who pass the stress test help reassure new lenders of their credibility. This is why if you fail the stress test, you will be forced to renew your loan with your current lender.
About Current Mortgage Renewal Rates
Mortgage renewal rates in Canada are highly competitive, which is understandable given that most Canadian mortgage borrowers would renew their mortgage repeatedly throughout the length of their loan.
To attract clients, mortgage lenders offer cheap mortgage rates to individuals who want to switch or transfer, while the existing lender will try to offer a low mortgage renewal rate to keep borrowers from switching. Mortgage renewal rates are typically as low as new purchase rates and cheaper than refinance rates.
Renew Mortgage vs Refinance
The key difference between a renewal and a refinance is that with a refinance, you will be borrowing more money, and refinance rates could be higher than renewal rates.
When you refinance your mortgage, you use your home equity to borrow more money on top of your current loan. As a result, a new mortgage with a bigger sum is issued. Mortgage renewals, on the other hand, are limited to the same debt amount.
Mortgage renewals are only possible when your loan is nearing the end of its term, with some lenders permitting early renewal periods a few months before the end of the term. It is a better option for borrowers looking to simply repay their mortgage without obtaining extra funding and has ideal interest rates and repayment periods.
Things to Consider Before Renewing Your Mortgage
There are a few things you should consider before signing your renewal contract:
- Do you have the funds in your budget to pay off your mortgage faster and save money on interest?
- Do you want to adjust how often you make your payments?
- Are you happy with the service you’ve received from your lender?
- Do you want to be able to make additional payments without incurring any penalties?
- Are you happy with the current interest rate?
- Do you wish to consolidate your debts and borrow more money to pay off your mortgage?
These questions can help you decide whether or not you want to switch lenders. But don’t put off making a decision until you receive your renewal contract. It’s important to understand the repercussions of switching if you do decide to do so.