Mortgage Renewal –Key Things to Consider
A mortgage renewal is an opportunity for you. It is the best time for you to consider a change. It presents an opportunity to i) find a mortgage that better suits your needs, ii) move on from your current lender if you are not satisfied with them, or iii) seek a better rate in the market. You are already an experienced borrower. You know what you are looking for. Now that you have experience, your understanding of the process gives you an advantage.
Here are some key considerations for you as you consider your mortgage renewal.
Has your financial situation changed?
If your financial situation has improved, then you may be able to get a better deal on your mortgage renewal. You may be able to qualify for the lowest rates and be able to increase the size of the mortgage on renewal. If you are a B or subprime borrower who had to take out a higher rate mortgage due to your prior financial circumstances, you now might be able to take a step up and get an A mortgage with better terms and a better rate.
However, if your financial situation has deteriorated, it may be difficult for you to switch or refinance your mortgage with another lender. If your credit score or income has declined, or other circumstances deteriorated you may not pass the underwriting scrutiny of a new lender.
Flexibility
Are you planning to move in the near future? Might your employment circumstances or income prospects change? If there are any reasons why you think you might need to sell or refinance your property within the next five years then consider a shorter-term mortgage. Or consider a variable rate mortgage which will have lower prepayment penalties than a fixed rate mortgage.
Mortgage Rates
Don’t immediately accept the renewal offer from your current lender. Your current lender will usually offer this mortgage renewal around six months prior to the mortgage maturity date. Some lenders may offer you a “special” rate if you renew early. They want to keep you as a customer and get the transaction done quickly. But is it really a “special” rate? Some lenders are notorious for offering uncompetitive rates to customers on renewal. You should research the market to find the best rates. Maybe you find a better rate and decide to go with a new lender. Maybe you search the market and then go back to your current lender to see if they can match the better rates you find. But do they deserve that opportunity after showing you, a good customer, an uncompetitive renewal rate?
Consider a Mortgage Switch
With your current mortgage term close to ending, you are free to shop around. If you are unhappy with your current lender, or do not think their renewal offer is competitive, then a mortgage switch may be a good alternative for you. A mortgage switch means you move your current mortgage from one lender to another. With a mortgage switch you cannot alter the mortgage balance or remaining amortization period, but you can get a new mortgage rate and possibly better payment terms from your new lender.
A fresh start with a new lender offering a better rate is an enticing proposition for many. Changing lenders during the term of your mortgage would require you to pay prepayment penalties, but for a switch at renewal there are no prepayment penalties. Another advantage is that sometimes the new lender will offer incentives like paying for lawyer fees or an appraisal.
Note that if you have a collateral mortgage (common if you have a Heloc) a mortgage switch is not a viable option. You would need to hire a lawyer to discharge the collateral charge.
Consider Refinancing Your Mortgage
Do you need to borrow more money to consolidate debts, pay for some renovations or big-ticket items? If so, you can refinance for a larger amount and still get a competitive, low mortgage rate. Like a mortgage switch, a refinance is an opportunity to find a better lender and a better rate. The maturity of your current mortgage is the perfect time to consider a refinancing because it is the only time you can refinance without paying prepayment penalties.
Online mortgage brokers like Frank Mortgage can make a switch or refinance simple by providing a one-stop shop to search for current market rates from a variety of lenders and also allowing you to complete the process entirely online.
Understand the Process
The process for obtaining a renewal with your current lender is simple. Sign the renewal letter and the lender takes care of the rest.
The process for switches and refinances are different. A refinance is like getting a brand-new mortgage, requiring a complete new mortgage application. However, to borrow more money and get a better rate, it can be well worth it.
A switch is a much more streamlined and simple process that makes the transaction relatively easy. The new lender will need to see some documentation, such as:
a) a copy of your current mortgage;
b) a copy of your property tax statement;
c) proof of property insurance; and
d) confirmation of income, like a pay stub.
As long as your property’s value supports the mortgage amount, and your financial situation has not declined from the time of applying for your current mortgage, you should be able to qualify for either a switch or a refinance.
At renewal when considering the options noted here, the essential trade-off is ease versus saving money with a little extra effort. Here is a numerical example for a five-year mortgage with a balance of $500,000. In this example, the current lender offers you a five-year, fixed rate on renewal of 3.25%. You then use a service like Frank Mortgage and discover that there are better rates available in the market.
As shown above, the savings can be material. Lower monthly payments lead to significant cash flow advantages over time (note the outcome of the variable rate scenario will depend on how interest rates move over time).
Consider the Costs
Finding a better rate, or a better lender, sounds enticing. It can be well worth the effort to do so, but there are some costs to consider. With a switch or a refinancing, the following fees may apply:
A fee for an appraisal for the new lender;
Legal fees for the new mortgage agreement;
A fee to discharge your current mortgage from the property title and register the new mortgage;
For a switch there is a fee to assign the current mortgage to the new lender
These fees could range anywhere from $1,500 to $2,500 in aggregate. With a switch, however, the new lender will often offer an incentive that covers the cost of some of these fees. The costs not covered by the lender may be more than covered by the savings from switching or refinancing to a better deal.
The Health of the Current Real Estate Market
You also need to consider the value of your home. In Canada, market values have been rising for the better part of the last decade. If your mortgage comes up for renewal in a market downturn be aware that switching or refinancing with a new lender will require an appraisal. If your property has maintained or increased in value since you originally obtained mortgage financing, then the appraisal should support a value for a switch or even an increase in mortgage balance via a refinancing. If the market value of your property has declined, you may not be able to switch or refinance for a balance equivalent to the current balance on your mortgage. A large decline in market value would have to occur for this to happen but it is something to be aware of.
Take Charge of Your Mortgage Renewal
You now have experience with your mortgage and home ownership. You understand the process. Not only are you now better prepared for your mortgage renewal but there are online tools built just for knowledgeable borrowers like you. Frank Mortgage allows you to quickly research the market for competing mortgage rates from many lenders, places you in control and makes the mortgage application easy by keeping the entire process online. If you want your best deal at mortgage renewal time, look no further, visit us at www.frankmortgage.com.
Don Scott
Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.
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