How To Renew Your Mortgage

When you first take out a mortgage, you’re contractually obligated to pay a certain amount of money at a specified interest rate for a set amount of time, known as your mortgage term. (The amortization period, however, is the amount of time it will take to pay off your mortgage in full. You will have several terms during your amortization period.) A mortgage term is typically for one, three, five or 10 years. At the end of your mortgage term, unless you pay the outstanding balance in full, you’ll need to renew your mortgage for a new term. When you renew your mortgage, you can make changes to your mortgage contract for the duration of the new term to ensure it’s still a good fit for your financial situation.

There are two ways to renew your mortgage:

• Automatic renewal: Your lender will provide you with a mortgage renewal statement at least 21 days before the end of the existing mortgage term, though many will initiate this process sooner. You can choose to accept your mortgage offer as is, and your mortgage will automatically renew for a new term. Alternatively, you can negotiate changes to your mortgage, such as changing your term from a 5-year fixed-rate mortgage to a 3-year fixed-rate mortgage, and if accepted by your lender, your mortgage will renew with those new terms.
• Early renewal: Most lenders will have an early renewal option; depending on your lender, it could be 120 days, 150 days or 180 days before maturity. There may be a fee for renewing early, but this may be waived by your lender. If you think interest rates may go up before your current mortgage term is up, an early renewal can help ensure you can lock in the best interest rate.

If you choose to renew your mortgage automatically, that is accept the offer as presented by your lender, you don’t need to do anything. The mortgage will roll over on the renewal date and you’ll start making your mortgage payments at the new rate. This is by far the easiest option, but you lose all your negotiating power and choice with the terms of your mortgage.

If you want to change the terms of your mortgage with your current lender, each will have their own process for communicating that change. You may be able to submit your application online, or you can visit your branch (if you have one), call your mortgage agent or return the documents by fax or mail.

If you want to switch to a new lender, you’ll want to start that process well before your renewal date as you’ll need to go through the mortgage application process again.

Related: 10 Tips To Get Approved For A Mortgage

What Is a Mortgage Renewal Statement?

A renewal statement is sent by your lender before your mortgage renews and shares important information about the details of your loan. It should contain the following information:

• Total principal amount owed
• Interest rate
• Amortization
• Payment amount
• Payment frequency
• Mortgage renewal date
• First payment due date
• Total amount of principal and interest paid during the term
• Projected balance at maturity

Your statement should also include information about your rights and obligations with your mortgage, such as:

• Skipping a payment (this may not apply to insured mortgages)
• Increasing a payment without prepayment penalties
• Prepaying an amount to be applied directly to the principal

Your lender will offer a rate guarantee that holds the offered interest rate for a certain amount of time, such as 30 days. It’s important to read the mortgage renewal statement carefully so that you understand the implications of either accepting a renewal as presented, negotiating new terms or switching to a new lender.

Mortgage Renewal Versus Refinancing

Renewing a mortgage is not the same as refinancing, though there are some similarities.

With a mortgage renewal, you may decide to change the terms of the mortgage contract, such as the interest rate or term, but the total amount of money you are borrowing remains unchanged. A mortgage renewal happens on a scheduled date (the maturity date), or within the early renewal period. You do not need to requalify for a mortgage renewal.

In contrast, with a mortgage refinance, you are breaking the terms of your current mortgage contract, paying out your existing mortgage and negotiating a new contract. You will need to requalify for the mortgage and pay any prepayment penalties, which can be very expensive if you have a closed fixed-rate mortgage. You may decide to refinance your mortgage for a greater amount of money so you can access the equity in your home, for example, or if you want to extend your amortization. A mortgage refinance can happen at any time.

Here are the main differences between a mortgage renewal and mortgage refinance:

When you first take out a mortgage, you’ll make a slew of decisions about the mortgage term, payment frequency and so on. Consider your mortgage renewal as an opportunity to review if these decisions still suit your current and future financial needs. Some questions that you could ask yourself include:

Do you want to change your amortization period? The amortization period is the amount of time it’ll take to pay off your mortgage in full. When you first take out a mortgage, the amortization period is typically 25 or 30 years. At renewal, you can choose to keep the same amortization, extend it or shorten it. With a shorter amortization, your mortgage will be paid off sooner but your payments will be higher. With a longer amortization, the reverse is true. Keep in mind that changing your amortization is considered a refinance, even if you stay with the same lender.

Related: Should You Extend Your Amortization?

Do you want a fixed-rate or variable rate mortgage? The most popular mortgage across Canada is the fixed-rate mortgage, where your interest rate—and your payment—stays the same for the length of your term. With a variable-rate mortgage, your interest rate (and therefore your payment) varies in sync with changes to the prime rate. Historically, variable interest rates are lower than fixed rates (though this isn’t currently true), but there is more volatility. If you expect interest rates to drop in the future and you don’t want to lock in at a higher fixed rate, you might consider a variable-rate mortgage.

Related: Should I Choose a Fixed-Rate or Variable-Rate Mortgage?

Do you want a one, three, five or 10-year term? The term is the amount of time that you’ll pay an agreed-upon amount. If you think interest rates may go down, you’re likely to pick a shorter term so you can take advantage of lower interest rates at the next renewal. For example, if you lock in for a 5-year fixed-rate mortgage at 6.10%, you will be paying that for five years even if the prime rate drops during that time. But if you lock in for a 3-year rate, you’ll have the opportunity to then take advantage of the lower rate sooner. The interest rate for the 3-year rate is likely currently higher than the 5-year rate, so you need to factor that into your calculations.

Do you want to change your payment frequency? Typically, you can select from several different payment frequencies, including monthly, semi-monthly, accelerated biweekly and weekly. If you choose an accelerated biweekly over a semi-monthly payment schedule, for example, you’d pay your mortgage every two weeks and therefore make two extra payments (26 payments versus 24) each year. As there is less interest accruing between payments and you make two extra payments, you can make a significant impact on the amount you pay down during the mortgage term.

Assuming a $300,000 mortgage at 6.10% interest rate with a 25-year amortization and 5-year term, you can see how at the end of the term, you will have paid down almost $11,500 more of your mortgage with an accelerated biweekly payment schedule:

Do you want to increase your monthly payment? Your mortgage payment is a combination of interest and principal. At the beginning of your mortgage amortization period, you are paying mostly interest. However, if you are able to increase your monthly payment, from $1,850 to $1,875, for example, that extra $25 goes directly to the principal, and small amounts can add up. Your lender will have specific rules regarding how much you can increase your payments, typically between 20% and 25% of your regular monthly payment. (If you have an open mortgage versus a closed mortgage), you can prepay all or part of what is owed on your mortgage at any time. (The interest rate of an open mortgage is typically higher than a closed mortgage due to this flexibility.)

Do you want to make a lump sum payment? If you have the extra cash, say you came into an inheritance, making a lump sum payment against your mortgage can be an effective way to pay down your balance as it goes directly to the principal. Once again, your lender will have specific rules about how much you can pay down and how frequently. For example, Tangerine allows mortgage holders to make a lump sum prepayment of up to 25% of your original mortgage amount without penalty.

Related: Should You Pay Off Your Mortgage Early?

Do you want to switch lenders? You may find that another lender offers you a better interest rate, so you may decide that you want to switch. While you won’t need to pay any prepayment fees for breaking your mortgage contract early if you switch at renewal, you will need to complete a new mortgage application and go through the mortgage approval process, which may include the stress test. There are also several fees involved, including a property appraisal, discharge fee, transfer or reassignment fee, and other administrative costs. Before moving to a new lender, it’s important to do the math to see if there’s still a net savings.

Once you review your mortgage renewal statement, you may decide that you want to shop around for a better rate elsewhere. Before making that decision, it’s important to be aware of the following:

• The new lender will need to approve your mortgage application and their criteria may be different from your current lender.
• You may need to pass the stress test, which is 5.25% or the rate you’re being offered, plus 2%, whichever is greater. So if you’re offered a mortgage at 6.10%, you’ll need to qualify at 8.10%. If you can’t pass the test, you may decide to stay with your current lender. Keep in mind that uninsured or conventional mortgages are not subjected to the stress test (with certain conditions), and mortgage holders can requalify at their contract rate. Also, credit unions and alternative lenders are not bound by the stress test.
• There are significant costs associated with changing lenders, including a discharge fee, registration fee, transfer and/or assignment fees from your current lender.
• Your new lender may require an appraisal of your home at a cost between $300 and $700.
• If you have an insured mortgage, that is you put less than 20% down payment on your house, you may need to pay a new mortgage loan insurance premium if the amount of your loan increases or you extend your amortization, which is considered a refinance. If your mortgage terms stay the same, inform your new lender that the mortgage is already insured. (You can request a certificate number from your current lender as proof of insurance.)

• Start early. Don’t want until the last minute to consider your options, especially if you think you might switch lenders. If you don’t renew your mortgage before the maturity date, it may automatically roll over into a new term at a rate that is higher than it would have been if you had planned ahead.
• Think ahead. If you expect your financial situation to change within the next few years (if you want to start a business or a family, for example), ensure that the mortgage choices you make today will work in that future.
• Shop around. If you’re unhappy with your current lender or think you can find better rates or more favourable terms elsewhere, shop around.
• Negotiate. Don’t feel obligated to take the mortgage renewal as offered. There may be some wiggle room with interest rates, for example.
• Pay extra, if you can. Your lender will outline the prepayment terms, such as making a lump sum payment once a year (that goes direct to the principal, without a prepayment penalty) or increasing your scheduled payments. If your monthly payment is $1,850, even rounding that up to $1,900 can make a dent in your overall debt load as that extra $50 goes directly towards paying down the principal.

Your home is likely your biggest asset, but your mortgage is likely your biggest debt. Your mortgage renewal is a great time to assess your financial situation to ensure your loan still meets your financial needs and goals. To make the most of this opportunity, it’s important to plan ahead, get expert advice if you need it and make the right decisions to ensure you’re not paying more than you need to.