- Dan Landry
UNDERSTANDING MORTGAGE RENEWALS
A Simple Guide to Understanding Mortgage Renewals in Canada
Let’s get down to the basics – What is a mortgage renewal?
Mortgage renewals are the bread and butter of home ownership. Not really, but they are EXTREMELY important. Mortgage renewals are a great opportunity to renegotiate the terms of your current contract with the current lender without needing to reapply for financing with another lender. Conditions may include the term length, interest rates, payment frequency, additional charges or fees, etc.
Loan terms and amortization are often interchangeably referenced. However, they are two separate topics. A term refers to the length of your mortgage agreement – i.e., the contract duration with your current mortgage lender. Most commonly, terms are five years, and their expiration is referred to as a maturity date. Amortization refers to the period it will take to pay off a mortgage in full. This varies based on the individual but is usually between 15 – 30 years.
What’s the difference between a mortgage renewal and refinancing?
These two terms are interchanged often, but they are two separate concepts. Mortgage renewals occur once the mortgage term has expired, and you sign on to another term with your current lender. Contrastingly, refinancing is the process of breaking your current contract to enter a new contract with either the same or different lender. Refinancing can occur at the end of a term or during your current term. However, if you choose to refinance during your current contract there may be associated penalties.
Think of mortgage renewals like a subscription streaming service. For example, you currently use Netflix for all your home entertainment binge-watching fun! You have a plan that renews monthly. One week before the plan is about to renew, you weigh out the pros and cons of switching to Disney+ and discontinuing the Netflix membership. Netflix continues to give you great options, but you want to see what else is out there.
1) Staying with Netflix is like a mortgage renewal. You stay with your current provider for another term because you like the services and options they provide.
2) Switching to Disney+ is like refinancing your mortgage. You’ve weighed out your options and left your current provider in hopes of obtaining something better (i.e., different shows or better interest rates).
When can I start the renewal process?
The answer is dependent on the conditions of your current lender. Typically, your current mortgage lender will send you a renewal slip 30 days before your mortgage term’s maturity date (expiration). To optimize the renewal process, you can usually start negotiating 90 to120 days before your term’s maturity date. Resultantly, many lenders will not make you pay a prepayment penalty.
How long does a mortgage renewal process take?
At a minimum, allocate at least 3-8 weeks to complete the mortgage renewal process. This will ensure all the paperwork is in place for your next mortgage term. However, beginning the process early will allow your mortgage agent/broker to shop around for the best rate and/or negotiate conditions with your current lender. Ideally, you do not want to be stuck with your current lender with a less than optimal rate for your next term.
What are the options at the end of a mortgage term?
Generally, there are three options:
1) Pay off the remaining balance (principal)
2) Mortgage renewal
3) Mortgage refinance
Suppose you have a 20-year mortgage and are up for renewal at the end of the first five-year term. You have a goal to be debt-free, so you choose to option one – to pay off the remaining principal. This means that you owe the bank the principal mortgage amount for years 5-20, NOT the interest you would have paid for years 5-20.
Maybe mortgage renewals ARE the bread and butter of homeownership – or maybe they are the underlying financial foundation. When you first buy your property, the mortgage terms and conditions dictate your monthly payments and shape your housing budget. Mortgage renewals piggyback off the initial agreement and enhance the terms and conditions or provide an opportunity to renegotiate. Resultingly, your payment schedule will likely be impacted.