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Definition of mortgage renewal
In Canada, most mortgage terms are for a period of five years or less, after which the borrower has the option to renew their mortgage for another term if the mortgage hasn't been fully paid off yet. A mortgage renewal is essentially the process of extending your current mortgage loan for another term, with a new interest rate, at the same lender. Your mortgage principal, which is the amount that you owe, cannot increase during a renewal.
Reasons for needing to renew a mortgage
You’ll need to renew your mortgage if you haven’t fully paid it off yet by the end of your mortgage term. That’s because your mortgage’s amortization, or the length of time it takes to pay off your loan, is typically longer than your mortgage term in Canada.
For example, if you have a 25-year amortization and a 5-year mortgage term, you’ll need to renew your mortgage after five years. If you continue going forward with 5-year terms, then you’ll be renewing your mortgage every five years until it’s fully paid off after 25 years.
Understanding the timing of the renewal process
A mortgage renewal happens at the end of your current mortgage term, which can vary from 1 to 10 years depending on what term length you have chosen. This means that if you have a 5-year fixed-rate mortgage, your mortgage renewal will happen on the fifth year of your loan.
While mortgage renewals are typically done at the end of the term, it's important to start considering your options and discussing them with your lender a few months before your maturity date. This will give you enough time to research and compare rates from different lenders, negotiate new terms with your current lender, or make any necessary changes to your mortgage. Some banks and lenders also offer early mortgage renewals, often as far out as four months before the end of your term.
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Mortgage renewal rates in Canada are fiercely competitive, and that’s because most Canadian mortgage borrowers will be looking to renew their mortgage multiple times over the life of their mortgage. 90.4% of mortgages are renewed at the same lender, however, the 9.6% that are refinanced or switched to another lender is also important to lenders.
To attract borrowers, mortgage lenders offer low mortgage rates for those looking to switch or transfer, while their current lender will try to offer a low mortgage renewal rate to ensure that they don’t switch to another lender. Mortgage renewal rates will often be as low as mortgage rates for new purchases, and lower than refinance rates.
Your mortgage lender will offer you a renewal rate when your mortgage is up for renewal. This mortgage renewal rate will be locked in if you agree to renew your mortgage for another term. This rate might not be the best rate available, which is why looking at other lenders can help you determine if your lender is offering a competitive rate.
Some banks offer a guarantee that your mortgage renewal rate will be the lowest in a certain period. For example, RBC offers a 30-day renewal rate guarantee, which promises that if rates decrease below your agreed-upon rate in the 30 days before your renewal date, then your mortgage rate at renewal will be the lowest rate during this 30-day period.
When your mortgage is up for renewal, it's important to take the time to carefully review your current loan and consider all of your options before making a decision. Here’s what you should do when your mortgage is up for renewal.
The first step when your mortgage is up for renewal is to review your current mortgage terms. Take a close look at your interest rate, payment schedule, and any other conditions that may affect the overall cost of your mortgage. This will help you understand if there are any changes or improvements you would like to make during the renewal process.
For example, if you have excess cash, you may want to make additional payments towards your principal amount to pay off your mortgage faster. At mortgage renewal, you can make lump-sum mortgage prepayments without any mortgage penalties from your lender. You may also want to consider increasing your regular mortgage payments or making extra payments.
Or, if you anticipate a change in your income or expenses, you may want to consider extending your amortization period for lower monthly payments. To do so, you’ll need to refinance your mortgage instead.
Once you have reviewed your current mortgage terms, it's important to explore all of your renewal options. This includes researching and comparing mortgage renewal rates from different lenders, negotiating new terms with your current lender, or even considering switching to a different type of mortgage. For example, if you need to borrow more money or you want to reduce your payments with a longer amortization, you might need to consider a mortgage refinance. Another thing to compare is whether you want to go with a fixed or variable rate mortgage.
While your mortgage’s amortization will remain the same when renewing, unless you have a variable mortgage rate that causes interest to accumulate or you refinance your mortgage, you can change and renew into a different mortgage term length each time your mortgage is up for renewal. If you are at the end of a 5-year mortgage term, you don’t have to renew for another 5-year term. Instead, you could choose to change to a 1-year term or even a 10-year term.
Taking a look at a mortgage rate forecast can help you decide what term length to choose. If it’s expected that rates will significantly rise, you might want to lock-in a rate for a longer-term now while rates are lower. The opposite is true as well, if rates are expected to fall, you may want a shorter-term mortgage so that when your term is up for renewal again, the lower rates will be available to you.
You might also want to consider changing your mortgage payment frequency. Making more frequent payments, such as through accelerated bi-weekly or weekly payments, can significantly reduce your mortgage interest costs.
If you decide to renew with your current lender, it's important to negotiate new terms that are favorable for you. While your lender will offer you a rate in your mortgage renewal statement, you can always try to negotiate for a lower interest rate. A mortgage broker can also help compare rates with different lenders and may help you to switch lenders if another lower rate is available. There may be additional costs for switching to another lender, such as mortgage discharge and registration fees.
Once you have reviewed and negotiated your mortgage renewal terms, it's time to sign the renewal agreement with your lender. It's important to carefully read through the agreement and make sure all of the terms are accurate and align with what was discussed during negotiations. If there are any discrepancies or concerns, be sure to address them with your lender before signing the agreement.
Since you’re renewing your mortgage rather than applying for a new mortgage, you won’t have to go through as rigorous of a process as when you first obtained your mortgage. You won’t need to pass themortgage stress test again, and some lenders may even have your mortgage renewed automatically if you don’t take any action to switch lenders at renewal.
However, a mortgage renewal isn’t guaranteed. Your lender may deny your mortgage renewal if your financial situation has significantly deteriorated. In that case, you’ll need to switch lenders, or even consider a B-lender orprivate mortgage lender.
You can be denied a mortgage renewal, as mortgage renewals are not guaranteed. Roughly 3% of mortgage renewals are denied. The approval rate is even lower for same lender refinancing, with 18.6% being denied a mortgage refinance.
If your financial situation has deteriorated, such as if you have missed mortgage payments on your previous mortgage, lost your job, or now have a significantly lower credit score, your mortgage lender might choose not to renew your mortgage.
If you’ve been denied a mortgage renewal, there are a few options that you can take. You could meet with your current lender to see if accommodation could be made, try to find a cosigner, or switch to another lender. You may have to consider a B-Lender or a private mortgage lender, which often have higher rates and fees.
Source: Bank of Canada, Statistics Canada’s Survey of Non-Bank Mortgage Lenders, and CMHC estimate
During your mortgage renewal process, you can expect to receive a mortgage renewal statement from your lender. This will outline the terms of your current mortgage and any options for renewing or changing these terms.
You'll receive a renewal letter from your lender at least 21 days before your mortgage term is set to expire. You may receive this letter by mail or electronically, depending on how you have set up communication with your lender.
It's important to carefully review this statement and pay attention to any changes in interest rates or terms. The renewal statement will include:
Your renewal statement may also come with a mortgage renewal contract for you to sign and return if you agree with the new terms offered by your lender.
Your renewal statement will state if your mortgage will be automatically renewed. Some lenders might have automatic renewals, which means that your mortgage will automatically renew if you do not take any action. Automatic renewals indicate that you accept the terms and rates that your lender offers, which might not always be the most favourable.
The offer in your mortgage renewal statement may include changes to your current interest rate or other terms. It's important to carefully review these changes and understand how they will impact your mortgage payments and the cost of your mortgage.
Some potential changes you may see are:
You may also use this opportunity to renegotiate or negotiate new terms with your lender that better suit your needs.
If you are not satisfied with the renewal offer from your current lender, it's important to explore other options if negotiating with your lender doesn’t result in a rate that you’re satisfied with. You may consider switching lenders or refinancing your mortgage with a different lender who can offer more competitive rates and terms, and using a mortgage broker who can negotiate rates on your behalf.
It's also important to keep in mind that you don't have to wait until your mortgage term is up to seek alternative options. You can start exploring and negotiating with other lenders at any time to find the best mortgage terms for your financial situation. If you find a low enough rate, you may even want to consider breaking your mortgage early and refinancing, if it makes sense to do so after paying mortgage prepayment penalties. Refinancing rather than renewing also allows you to borrow more money using your home’s equity, giving you access to cash at a relatively low interest rate compared to other loan options.
A standard charge mortgage is registered for the specific amount of your loan. This means that if you want to borrow additional funds against your property, you will need to apply for a new mortgage. When renewing a standard charge mortgage, you have the flexibility to switch lenders without any additional fees or penalties.
On the other hand, a collateral charge mortgage is registered for an amount that is higher than your loan amount. This allows you to borrow additional funds, up to the registered amount, without having to apply for a new mortgage. However, this also means that if you want to switch lenders at renewal, you will likely have to pay legal and appraisal fees to discharge the collateral charge.
While most mortgages in Canada are standard charge mortgages, check to see if you have a collateral charge mortgage, as it can make it more costly to switch lenders.