How early should I renew my mortgage?
Jordan Lavin
It may catch you off guard when the letter comes in the mail: it’s time to renew your mortgage. Sign now, says your bank, and you’ll be all set for another five years.
But that letter probably arrived several months before your mortgage maturity date. Is it really best to sign the renewal papers right away? Or is there an advantage to waiting? And what other options are there?
Why do I have to renew my mortgage?
While most Canadians pay off (amortize) their mortgage over a period of 25 years or more, the length of the mortgage contract (known as the “term”) is usually much less. Because of rules governing the mortgage industry, terms are effectively capped at five years. And while terms up to 10 years are technically available, almost nobody chooses them. In fact, recent data from Statistics Canada shows that 86% of fixed-rate mortgages now carry terms of five years or less.
Also read: Mortgage term vs. amortization
All of this means that Canadians have to renew their mortgage contracts every five years or less. That’s not necessarily a bad thing, however. Your mortgage renewal is your opportunity to explore your options and look for a better deal. It’s also the best time to take out equity, refinance, or make a large prepayment without paying a penalty.
What are my options at renewal?
When your mortgage matures at the end of its term, you have a few options: you can renew your mortgage with your existing lender, get a mortgage with a new lender, or repay your mortgage in full.
Renew with your existing lender
The easiest of the options is to renew your mortgage with your existing lender. Roughly six months before your mortgage matures, your lender will send you a renewal form outlining your options. All you have to do is sign, and you’re all set for another term.
The downside to renewing with your existing lender is that they may not be giving you the best deal. Banks know it costs time and money to switch to a new lender, and account for that in their offer. They also know that many customers will simply accept the renewal as it’s offered without comparing rates.
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Get a mortgage with a new lender
Oftentimes, you can get a better mortgage rate or more favourable terms by switching your mortgage to a new lender instead of renewing with your existing lender. Even just a few basis points can make the difference of thousands of dollars in interest over the term of your mortgage.
Changing to a new lender also opens up opportunities for refinancing. This is the best time to access equity in your home or make a large prepayment.
However, changing to a new lender can be costly and time consuming. To do so, you’ll need to compare mortgage products to find the best rate and terms, complete a lengthy application, and hire a real estate lawyer to complete the transaction. You’ll also have to pay your existing lender’s discharge fee of around $400.
Then there’s the matter of the mortgage stress test. If you have an uninsured mortgage (where you’ve paid more than 20% down and do not have mortgage default insurance), you will be required to requalify based on today’s stress test (currently 2% higher than your contract rate). If you have an insured mortgage, you’ll be able to make the switch without being re-stress tested, assuming all other aspects of your mortgage – such as your loan amount and amortization – remain the same.
Repay your mortgage in full
If you have the money available, you can also choose to become mortgage-free and simply repay your mortgage rather than renewing. You may require a lawyer’s services to complete the transaction and you may be required to pay your lender’s discharge fee as a final goodbye to home payments.
Also read: Can you pay off your mortgage at renewal? Should you?
When should I renew my mortgage?
Assuming you can’t afford to repay your mortgage in full, you’ll have to either renew with your existing lender or refinance with a new lender. The timing of when to do this depends largely on the interest rate environment.
When interest rates are going up
When interest rates are going up, it’s in your best interest to lock in a lower mortgage rate as early as you can. The longer you wait, the more interest you’re likely to pay.
If you’re renewing with your existing lender, you may be able to renew early – as much as six months before your mortgage matures. If you’re planning to switch lenders, your mortgage broker can hold a rate for as long as 120 days. Plan to start the conversation about six months before your mortgage matures to get the best deal.
When interest rates are going down
When interest rates are going down, it’s in your best interest to wait as long as possible before committing to a new rate. The longer you wait, the less interest you’re likely to pay.
If you’re renewing with your existing lender, you can likely wait until about 30 days before your maturity date to sign your renewal. If you’re planning to go with a new lender, your mortgage broker will hold a maximum rate with a rate hold and give you the better deal if rates go down before you sign the mortgage. Plan to start the conversation about three months before your mortgage matures to allow enough time to complete the application and associated paperwork.
When interest rates are holding steady
There’s not much benefit to renewing early when interest rates are holding steady, especially if the rate is likely to be higher than what you’re already paying. That said, it still takes time to compare mortgage rates and get approved for the best deal. Plan to contact a mortgage broker about three months before your mortgage matures to get advice and compare offers.
Why should I talk to a mortgage broker?
Mortgage brokers in Canada provide a free service to give you unbiased advice and help you understand your options at renewal. Your broker can help you understand what’s happening with mortgage rates, provide detailed advice on timing, and shop for mortgage rates on your behalf. You won’t have to commit to anything and your broker will tell you if your existing lender is giving you the best deal.
Plan to connect with a mortgage broker three to six months before your mortgage matures.
The bottom line
Renewing your mortgage can be a bit of a headache, but timing it right can save you thousands of dollars in interest. Plan to start the conversation with a mortgage broker three to six months before your mortgage renews to get the right advice and strategy for your mortgage renewal.