A mortgage renewal is the process of signing up for a new mortgage term once your current one ends.
Unlike other loans, mortgages can take an exceedingly long time to pay off (25 years is quite common).
A wide range of circumstances can change during this time, such as a rise in interest rates or a decline in the homeowner’s income.
Due to mortgages’ lifespan, lenders craft mortgage contracts for shorter periods.
You can expect to renew your mortgage multiple times before you pay it off in its entirety.
How Mortgage Terms Work
A mortgage term refers to the duration of time your mortgage contract remains in effect.
This period can be anywhere from six months to 10 years.
During this time, you commit to making regular mortgage payments and are bound to the terms and conditions of your contract.
Your interest rate will remain the same over the mortgage term, assuming you opted for a fixed-rate mortgage (it can change if you’ve chosen a variable-rate mortgage).
Should you break your contract before the term’s ending date by paying off your balance early, refinancing, or switching to a new mortgage provider, your lender will charge you a penalty.
Once your mortgage term expires, you’ll have the option to renew it for another one to continue paying down your balance.
Or you can pay off the remaining balance in full.
It’s worth noting that a mortgage term is not the same thing as mortgage amortization.
The latter is an entirely different concept and refers to the length of time needed to pay off your mortgage in full.
Your mortgage amortization period will typically consist of several mortgage terms.
The most popular mortgage term in Canada is five years.
Considerations When Renewing Your Mortgage
Here are the three main things you should consider when renewing your mortgage.
1. Negotiate for a lower rate
If you don’t take the initiative to inquire about your rate options, your lender may assign you a higher rate than the one you’re entitled to receive.
For this reason, you should be proactive and set up an appointment with a mortgage specialist at the financial institution that issued your mortgage.
Ensure you conduct some research to see what interest rates competing lenders currently offer.
That way, you’ll have more leverage when negotiating.
Be sure to present your existing lender with proof of any competitive offers.
Suppose you’ve been a loyal customer for many years.
In that case, you could also use this fact to your advantage to further boost your bargaining power – your lender may be more apt to assign you a discounted rate.
If you communicate in a friendly, courteous, and diplomatic manner, you stand a solid chance of securing a favourable rate.
2. Review your financial situation
It’s wise to examine your current financial circumstances and how your mortgage fits into the picture.
Securing a contract that aligns with your financial goals and accommodates your budget should be your priority.
Here are some vital questions you should ask yourself before committing to a decision:
- Can you afford to increase your payments so that you can accelerate the pace at which you pay down your mortgage balance?
- Do you wish to change your payment frequency?
- What term makes most sense for you?
- Can you afford to make a prepayment?
- Do you prefer a closed mortgage or an open mortgage?
3. Shop around
Dedicate some time to exploring what the mortgage market has to offer.
After all, a mortgage contract is a multi-year commitment – you don’t want to get stuck with one that doesn’t align with your budget and financial goals.
Shopping for a mortgage can be a time-consuming and arduous process, so don’t hesitate to reach out for some help.
Ask your family and friends if they know a knowledgeable and trustworthy mortgage broker.
These mortgage professionals can help you evaluate the vast array of mortgage products available and narrow down your choices.
Another way to see what lenders have to offer is to use a rate comparison website.
These websites aggregate mortgage lenders’ rates and terms and conveniently present them side by side, allowing for a quick and easy assessment.
Suppose you decide to switch lenders during the renewal process.
In that case, you’ll need to pass the mortgage stress test again.
Suppose you decide to switch to another lender when renewing your mortgage. In that case, you need to budget for some potential extra costs, including setup fees, transfer fees, appraisal fees, and legal fees.
Mortgage Renewal Process
The mortgage renewal process is straightforward and consists of three steps:
Step 1 – Mortgage renewal statement
Your lender will send you a mortgage renewal statement a few weeks to a few months before your term ends.
By law, all federally regulated financial institutions are required to provide mortgage holders with a renewal statement at least 21 days before the current term expires.
The statement will include all pertinent details regarding your mortgage, including your outstanding balance, payment schedule, term length, fees, and various conditions.
In addition, the statement will also contain the lender’s current rate offering, which you can lock in before your mortgage term’s expiry date.
Most lenders allow you the opportunity to place a rate hold much earlier, though, up to 180 days in advance in some cases.
This feature is handy if you anticipate interest rates to rise – you can secure a low rate in advance, saving on future interest charges.
Did You Know
Your lender may elect not to renew your mortgage if your financial situation has significantly deteriorated, such as a decline in your income.
Step 2 – Negotiation
Once you’ve reviewed your renewal statement, you’ll have the opportunity to ask your lender questions and negotiate the terms of your contract.
During this time, you might also have the option to contribute a prepayment toward your balance without incurring a penalty.
Start early – set up an appointment with your lender well in advance of the mortgage term expiring.
In many cases, your lender will notify you of the impending renewal and offer to answer any questions or concerns you might have.
However, there’s no guarantee they will reach out first, so it’s wise to initiate contact yourself.
Step 3 – Signing of contract
Once your lender finalizes your mortgage details, they’ll send a contract for you to sign.
These days, many lenders share documents electronically which you can complete through your online banking.
Frequently Asked Questions
- Does a mortgage automatically renew?
In some cases, yes. Your lender will specify in your renewal statement whether your mortgage contract will renew automatically. If you’re unsure, you should contact them before your term ends, especially if you’re keen on exploring your mortgage options.
- How often does a mortgage renew?
How often your mortgage comes up for renewal depends on the length of your mortgage term. In Canada, mortgage terms can span periods of six months to 10 years. Each time your term ends, you’ll have the option to renew, provided you still have a balance outstanding.
Suppose you secure a mortgage with a 25-year amortization period and choose a five-year mortgage term, which you’d like to use each time it comes up for renewal. In that case, you can expect to renew four times before you pay off your entire balance.