Buying a home and making mortgage payments is a big responsibility. What a lot of first-time buyers aren't aware of however, is that their mortgage term will eventually expire, and a new mortgage contract will need to be signed.
So, what exactly does this mean for homeowners? And what happens when you renew your mortgage? Stick around to learn more about the mortgage renewal process from the home insurance experts at BrokerLink.
What is a mortgage?
Before we begin, an introduction to mortgages is needed because, let's be honest, the real estate industry can be confusing, especially for first-time home buyers! To put it simply, a mortgage is a legal/formal contract, which, in this case, is signed by an individual(s) and mortgage lenders (financial institutions or creditors).
Once a mortgage contract has been signed, the mortgagee receives a lump sum payment, which they are then responsible for paying back with interest in the form of a mortgage payment, which can be paid monthly or bi-weekly over an amortization period, which ranges from 10 to 25 years in Canada.
Further, a mortgage almost always necessitates an upfront payment of a portion of the loan on the property. This is known as a down payment, which can be as little as 5% to as much as 20% of the loan amount.
What happens when it's time to renew the mortgage?
As we mentioned, typical mortgage terms range from 10 to 25 years. However, within these timeframes, you'll need to renew your mortgage several times, depending on your individual agreement. For example, if your amortization period is ten years, it may be made up of two five-year terms. Note that if you're able to pay off your mortgage within the 10 years, you won't need to renew your mortgage once the period is over.
What does the mortgage renewal process look like?
So, let's say it's time to renew your mortgage. This means you'll need to negotiate the terms of your current loan. Here's what this process will look like:
Receive your mortgage renewal statement
Your current mortgage lender will mail you a renewal statement upon your approaching mortgage renewal date. Lenders tend to send this notice anywhere between three and six months before the renewal time. The notice will include a renewal offer with a new interest rate and monthly mortgage term and your remaining principal balance.
Review your current mortgage payments
Now, you'll need to assess your current mortgage terms, including the interest rate, what your remaining balance on the mortgage is, your financial goals, and the mortgage term end date.
Shop around for competitive rates
Because your mortgage term with your current lender has come to an end, you'll be able to shop around and compare mortgage rates and terms from a different lender if you wish. Just note that this can help you find more favourable terms than what your current lender offers. When shopping around, make sure to consider different factors like interest rates, prepayment options, and any fees so you can compare them to your mortgage needs.
Negotiate with your existing lender
If you decide to stay with the same lender as your previous term, you are able to negotiate before filling out the renewal form. Most lenders will be willing to work with you on negotiating mortgage rates and your monthly payment so you can save money, but this isn't always guaranteed.
Apply for your new mortgage contract
On the other hand, if you've decided to work with a different lender than your current lender, you will need to submit a new mortgage application. Note: Only apply for a new mortgage if you are using a new lender.
Mortgage approval from new lender
Once the application form has been submitted, the new lender will review your application and if it is approved, they will provide you with new mortgage terms.
Close the deal and sign your new contract
The last step in the mortgage renewal process is to close the deal and sign your new contract. If you've chosen to switch lenders, you'll have to transfer your mortgage, which you may have to pay legal fees to complete. If you've stayed with your current lender, you won't need to transfer your loan when you renew your mortgage.
Start your new mortgage term
After the transfer of your mortgage is complete, you'll then be responsible for staying on track with your payment schedule, just like before.
Tips for navigating the mortgage renewal process
The mortgage renewal process can be incredibly daunting. But with these mortgage renewal tips, you'll feel more informed when your renewal time comes about in the future:
Start the renewal process early
As soon as you receive your renewal notice, begin doing research on current interest rates and industry trends, so you can decide whether to renew early or hold off a bit longer. This can help you avoid higher interest rates and truly weigh your renewal options and potentially save money.
Understand potential penalties
Make sure you understand whether there are any possible penalties for renewing your mortgage sooner or switching to other lenders for your new term.
Look at different interest rates
Decide whether a fixed rate or variable rate suits your current financial goals and risk tolerance. A fixed-rate will offer you more stability moving forward while you pay off your mortgage, while a variable rate will come with more of a risk but may offer a lower initial rate. Always compare fixed and variable interest rates. For more information, look at Pine financial mortgage rates using their online tool.
Re-evaluate your financial situation
During your renewal time, it's also important to consider your finances and future financial goals. Make sure you align your mortgage options with your short and long-term goals.
Speak with a mortgage broker
If you're still unsure how to move forward, don't hesitate to reach out and speak with a mortgage broker and your financial advisor. They will be able to answer any questions or concerns you may have about your existing mortgage, give you tips on how to become mortgage free faster, your options for mortgage insurance, and more.
Is renewing your mortgage the same as refinancing?
Now, mortgage renewal and refinancing your mortgage are different. We will explore the differences between mortgage renewal and mortgage refinancing below:
Mortgage renewal
A mortgage renewal occurs when your current mortgage term comes to an end. The renewal process typically involves the same lender. However, homeowners are able to renew with a different one if they wish. Overall, the renewal process involves negotiating new terms for your mortgage rates and payments.
Mortgage refinancing
On the other hand, mortgage refinancing can happen anytime. This process involves applying for a new mortgage, either with your current lender or a new one. The process itself is more complex, and homeowners can face different appraisal fees, legal fees, and penalties for breaking the terms of their existing mortgage.
Do I need hazard insurance on my mortgage?
"Do I need hazard insurance on my mortgage?” is a common question many potential homeowners in Canada have. Legally, you do not need to purchase hazard insurance when taking out a mortgage. That said, depending on your mortgage lender, you may be required to do so. Essentially, this type of insurance protects policyholders in the event the physical structure of their home is damaged following an insured event such as a hail storm or other instance.
The reason why a mortgage lender may require you to have this type of insurance is because it ultimately protects their investment at the end of the day. It should be noted that even though your specific lender may not require you to purchase this type of insurance, you may want to consider adding it to your policy regardless.
Hazard insurance offers you financial protection against risks that cause damage to your home that could end up costing hundreds to thousands of dollars in repairs. While you might not be able to prevent flooding and sewer backup, you can protect yourself from having to pay for repairs out of your wallet. To protect your finances and your investment, hazard insurance is definitely worth purchasing.
Insurance policies to think about as a homeowner
Beyond making mortgage payments, homeowners in Canada must protect their investments with high-quality home insurance policies. Here are some of the most common plans homeowners typically opt for:
High-value home insurance
High-value home insurance is specifically designed for properties in Canada that have a high market value, typically over $1 million. This type of home insurance is meant to offer homeowners extensive insurance coverage for their luxury properties and their high-ticket items. Depending on the terms and conditions of your insurance, high-value coverage can provide compensation to rebuild your home, replace your personal belongings, and offer liability protection against third-party lawsuits if someone claims they suffered an injury on your property or if they claim you caused property damage.
Condo insurance
Condo insurance protects homeowners who own a condo unit rather than a detached home. This insurance extends to their personal belongings and the interior of their unit against different risks like fire damage, flooding, vandalism, and more. Like home insurance, liability protection is also a part of condo insurance. Depending on the type of policy you have, condo coverage may also provide compensation for additional living expenses.
Note that if you own a condo unit, the building itself will come with insurance. However, this only extends to the common areas shared by all individuals living in the building, such as the gym, lobby, swimming pool, hallways, elevators, and other shared spaces. Therefore, if you own a condo and do not currently have an insurance policy, you may want to consider purchasing one to ensure your investment and individual units are protected against certain hazards and losses.
Vacation property & cottage insurance
Vacation property and cottage insurance provide coverage to individuals who own secondary residences used for vacation, such as cabins, cottages, or other types of seasonal property. This special insurance protects the physical structure and belongings left in your vacation home against specific risks like fires, theft, vandalism, and severe weather. Additionally, liability coverage will provide you with protection if someone is injured on your property or if you accidentally cause damage to another person's property.
Depending on the specifics of your individual policy, vacation and cottage insurance can also cover additional structures on your property, like a shed or garage. Further, because you won't be living in your secondary property all year round, there are options for coverage if you rent out your vacation home to others during certain times of the year.
Tenant and renters insurance
While technically not an insurance policy for individuals who own the home they're living in, tenant and renters insurance provides special coverage for those who are renting their property. This insurance protects renters' personal belongings against certain risks, such as fires, theft, and vandalism. It also includes liability coverage, which covers legal expenses and damages if they are found responsible for injuring someone or damaging someone else's property.
If the rental unit is not safe to live in due to a covered event, this insurance will pay for additional living expenses like housing until the policyholder is able to move it back.
Questions about home insurance? Contact BrokerLink today!
Do you have questions about what the difference is between home insurance and homeowners insurance? What about whether you qualify for insurance discounts for home alarm systems?
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