Mortgage renewal: Things you need to know

When your mortgage term ends, you will be up for a mortgage renewal. This will be an opportunity to negotiate your contract with your current lender (think payment frequency and interest rate) or switch to a new lender entirely. To figure out what will work best for you when renewing your mortgage, here is what you need to know.

What is mortgage renewal?

Mortgage renewal becomes necessary when you continue to owe mortgage repayments after your current term ends. When you get to that point, you will have the opportunity to take another look at your mortgage and the different factors that impact it, such as your choice of lender, payment frequency, the length of your new term, and your interest rate. For these reasons, the renewal period is critical to your general finances—and especially your mortgage.

How does the mortgage renewal process work?

When your mortgage term ends, your mortgage is up for renewal. This process assumes, however, that you have paid down your mortgage in full ahead of schedule and that you are not at the end of your amortization period. Typically, mortgage terms last for five-year terms, but can last anywhere from a few months to up to 10 years. A mortgage term is the amount of time that you have on your mortgage contract with your lender and outlines the conditions and terms of your mortgage. Conditions and terms typically include the type of mortgage rate you have—variable or fixed—your interest rate, and prepayment penalties or other fees associated with the contract.

Usually, renewing your mortgage with the same lender is a relatively smooth process—but only if you have made your payments on time. If you use the same lender, they will simply send you the renewal papers for you to sign and return. It may, however, make the most sense for you to shop around with different lenders to see if you can secure lower payment fees or a better interest rate.

Things to consider before renewing your mortgage

Before renewing your mortgage, you should consider the following factors:

• Do you want to change the frequency of your repayments?
• Do you have the funds in your budget to repay your mortgage sooner to save on interest?
• Do you want the option to make additional payments without getting penalized?
• Is your lender providing you with satisfactory service?
• Do you want to increase your mortgage loan and consolidate other debts?
• Are you satisfied with the interest rate on offer?

The answers to these questions can help you figure out if you want to retain your lender or switch to another one. Because it is important that you understand the consequences of switching lenders, it is essential that you do not wait until you receive your renewal contract to make your decision. In other words, it pays to do your homework here.

Understanding a mortgage renewal statement

Here are a few key points to understand when considering a mortgage renewal statement:

• The term;
• The payment frequency;
• Charges and fees that apply;
• The remaining balance of your mortgage; and
• The interest rate (specifying that the interest rate will not change until your date of renewal).

Most likely, you will receive your renewal contract and your renewal statement at the same time. Since banks and other federally regulated lenders must send you a mortgage renewal statement no less than 21 days prior to the end of your term, you will likely have more than enough time to figure out if you want to renew your mortgage with the same lender or switch lenders. The 21-day period also applies if the lender will not be renewing your mortgage.

What about a mortgage stress test?

A mortgage stress test is important to know about if you want to switch lenders. In fact, when switching lenders, you are required to undergo this test, even if your mortgage remains the same. The test doesn’t apply, however, if you stick with your current lender.

It is important to note that if you took out your mortgage prior to when the mortgage stress test came into effect—or when the mortgage stress test qualifying rate was low—you could be in a situation where you will be unable to pass the test if you switch lenders.

In order to pass the mortgage stress test, you have to prove to lenders that you can afford mortgage payments at the mortgage rate on the new mortgage plus 2% or the greater of the benchmark rate at 5.25%.

What to do when you move to a new lender

When you renew your mortgage with a new lender, you will have to submit a new mortgage application. A new lender could use different approval criteria than the previous lender. Switching lenders also come with a cost that you will want to consider, including set up fees, home appraisal, and various other administration fees. Another cost could be legal fees, which are occasionally covered by your new lender. Regardless, it will cost you more to break your mortgage contract mid-term than it would to switch lenders at the end of your mortgage term.

What happens if you still stay with the same lender?

If you stay with the same lender, you will be able to renegotiate your interest rate. This is especially helpful if interest rates have dropped. Because lenders have to disclose how they calculate certain fees, it is important for you to ask about potential fees and charge that may come with renegotiation.

It is possible to renegotiate your interest rate prior to the end of your mortgage term by utilizing a blend-and-extend option, which will let you extend your current term at a lower rate by blending it with the new interest rate.