Congratulations! You finally bought your first home, and the chances are you will be paying off a mortgage loan. The majority of people can't afford to buy a home outright, which is why mortgages exist. However, some people might not be familiar with a mortgage renewal. You likely have many questions about the mortgage renewal process and what it entails. Luckily, it's relatively straightforward so you don't have to worry about much after you've done it once.
Throughout your mortgage term, you have a monthly mortgage payment in place. The purpose is to pay off your mortgage while paying back the lender from whom you got the loan. However, you might wonder what comes next after a mortgage term ends.
Reaching this milestone gives you a plethora of new options, which you can use to your advantage. What does this mean, and why should you do it while you're still paying off your home? Find out more by reading through our intro to mortgages below!
What does it mean to renew your mortgage?
Mortgage renewal is when you renew your mortgage with a new one after a term concludes. The purpose is to renegotiate the terms of your mortgage contract. From there, you can accept new terms from the lender you chose back when you first applied for your loan. So, what happens when you renew your mortgage? When you choose to renew your mortgage, you can do any of the following:
- Pay a lump sum payment to your existing balance without being penalized
- Choose a term that suits your needs
- Select a fixed or variable interest rate mortgage
- Change how often you pay
- Find a new lender
- Refinance your mortgage (borrow against your home's equity)
When can you begin the mortgage renewal process?
If mortgage renewal feels like the right decision after speaking with your existing lender and mortgage broker, you're probably wondering when you can start the process. It's best to start the mortgage renewal process early. It will give you a chance to compare mortgage rates available from various lenders. Additionally, you see which option suits your needs and negotiate a better mortgage contract for your next term.
Your current lender will likely suggest that you start up to four months before the mortgage renewal date. Others will say you can renew your mortgage up to six months early. However, you should speak with your current lender to make sure there isn't a prepayment penalty.
The alternative is waiting to see the renewal offer from your current lender. In Canada, federally regulated lenders, such as large banks, often require a renewal statement a minimum of 21 days before your renewal date. What is a renewal statement? It's essentially a contract that outlines your new mortgage terms following a renewal. Details listed on the contract include:
- The remaining balance left to pay off the mortgage
- Current interest rate (with specifications that it will remain the same until the renewal date)
- Frequency of payment
- Mortgage term
- Any additional charges and fees
Mortgage lenders tend to send their own renewal offer, so you don't have to make your way through the process. You can choose to accept the offer or renegotiate it. Ask your mortgage broker for advice if you plan to do the latter.
Do you have to renew your mortgage?
The answer to this question will depend on your lender. Some lenders renew your mortgage if you don't respond to their offer before the renewal date. If this is your decision, it will be reflected in the renewal statement that was accepted by default.
However, automatic renewal is something to be aware of. This is because letting the automatic renewal process run its course doesn't let you negotiate the terms of your contract. As a result, you could get signed up for a shorter mortgage term that carries a higher interest rate.
What will happen if your lender denies your mortgage renewal?
Maintaining a solid income and paying your mortgage on time will ensure your mortgage gets renewed. However, if you lose your source of income or miss payments during a mortgage term, your lender might deny renewing your mortgage. This is because, like with insurance, you are considered a higher risk to work with.
When this occurs, not all is lost. If you began the renewal process early, you still have time to find another lender. In the majority of cases, you'll have to choose a b-lender. A b-lender is a lender that offers mortgages to those with low credit scores who aren't approved by a major bank.
You should be careful when you do this. That's because b-lenders charge higher interest rates because you are a higher risk to lend to. This is meant to be a short-term solution for a few years while you get yourself back on your feet again. The hope is to renew your mortgage with a bank and reduce your rates after the mortgage term ends.
Be aware that when a b-lender denies you, you will have to go to a private lender. The rates and fees are even higher than a b-lender. That's why if you are concerned when it's time to renew your mortgage, you should reach out to a broker. It will save you time and money.
How is your new mortgage payment determined?
When you renew your mortgage, you get a new mortgage payment rate. This occurs at the end of each mortgage term, which has varying timelines depending on how long it will take to pay for your mortgage. For example, you might be able to renew your mortgage after five years if you have a 25-year payment plan. This means the amount you have left to pay can go up or down depending on various factors. How is your new mortgage rate determined following a renewal? Here's everything you need to know about your mortgage payments after you renew:
Amount owing
Like when you initially applied for a mortgage, you can ask your lender for a loan. However, based on your needs, you will have to either borrow more or borrow less. Borrowing more will lead to a higher monthly payment.
Interest rates
Interest rates fluctuate, but if you choose a fixed-rate mortgage, you won't have to worry about this. In contrast, if you opt for a variable-rate mortgage, interest rates can change, which can either add or take away the amount of interest you pay on top of your mortgage payments.
Payment frequency
During your new mortgage term, you can choose how often you pay. You can opt for a traditional monthly payment plan and choose to make additional payments as you'd like. There's the option to make lump sum payments to lower your rates right away rather than relying on interest rates changing.
Amortization period
Your amortization period is how long it will take for you to pay off your mortgage. While having a longer will decrease your monthly mortgage payments, it can cause your interest rates to rise. If you're in a better financial situation, you can reduce your amortization period or extend it if the opposite is true.
How can you reduce your mortgage payment?
Renewing your mortgage is one way to reduce your mortgage payment. However, it isn't the only way. In fact, you have to wait until the mortgage term ends to renew. Whether you're looking to save money that would otherwise be spent on interest rates or need more time to pay off your mortgage, there are various approaches you can take. Let's explore how you can reduce your mortgage payments before you renew your mortgage:
Use a lump sum payment
A lump sum payment can make a difference in the long run. That's why it's a smart idea to put away some extra money and use it towards paying off your mortgage. Making a lump sum payment is when you put a set amount of money down to pay off your loan when renewing your mortgage.
Get a lower interest rate
One of the best parts about the mortgage renewal process is that it allows you to get a lower interest rate. If you don't already have a variable-rate mortgage, consider switching to one. It allows your interest rates to change with the market, which is a risk worth the reward.
Pay more often
Payment frequency plays a huge role in your mortgage rates. That's because paying more often and putting down higher amounts of money will decrease the loan you have left to pay off. The other advantage is that it will reduce your interest rate in the long run.
Opt for a longer amortization period
You can also alter your current mortgage contract by extending your amortization period. Yes, it will take longer to pay off your loan, but it also lowers the amount that you pay off each month. Try to avoid this option because you should pay off your mortgage sooner rather than later to avoid a higher interest rate.
Refinance your mortgage
This should be your last resort. Refinancing your mortgage only works if you already have equity in your home, which isn't the case for most people. You will also be subject to additional fees and will owe more interest throughout your amortization period. Consult your mortgage broker before choosing this option.
Is a fixed-rate mortgage or a variable-rate mortgage better?
The answer to this question may vary depending on who you ask. However, it really comes to you and your financial situation as well as how much risk you want to take. Understanding what each one entails is essential when renewing your mortgage because you'll have to tell your existing lender or a new one if you want to switch. Let's learn about each one to help you make an informed decision for the future of you and your family:
Fixed-rate mortgage
A fixed-rate mortgage is exactly what its name says it is. In this case, the fixed rate is the mortgage rate and payment. This is the safer option because the amount you pay will not change throughout the mortgage term. However, it's likely that your rates will be higher than those who chose a variable rate because yours do not change based on market rates.
Variable rate mortgage
Having a variable-rate mortgage is fairly risky, but it can pay off in the long run. That's because your interest rates, along with your mortgage rate, can increase throughout the term. On the other hand, they can also go down based on the market. This can pay off in the long run because there are fewer prepayment penalties and restrictions, which gives you the chance to pay off your mortgage early.
Reach out to BrokerLink today
If you have an existing mortgage, you're on your way to becoming a homeowner, and this isn't something you want to mess up. After all, purchasing a home is one of the biggest investments you'll make in your lifetime. That's why, at mortgage renewal time, it's a good idea to do your research and learn how to renegotiate a contract with a lower payment and interest rate.
You can use a mortgage payment calculator for Pine Financial mortgage rates to help you determine the best rates and whether it's a good idea to switch lenders. When you own a piece of property, you should protect it. That's why you should have valid home insurance and mortgage insurance policies. However, the type of coverage you have will vary depending on where you live and may include the following:
Are you wondering about the difference between home insurance vs. homeowners insurance or thinking about changing house insurance? If you're doing either of these things, a broker can help.
We can even help you determine whether you qualify for savings, such as an insurance discount for home alarm systems! Contact BrokerLink by calling, using our online quote tool or visiting one of our 200+ community branches across Canada today.
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FAQs
What is a maturity date?
A maturity date is the date your final mortgage payment is owed to your lender. By this date, all payments and debt must be repaid.
What is a mortgage renewal statement?
Before your current mortgage renewal date, you'll receive a letter, also known as a mortgage renewal statement or renewal letter, which includes your remaining principal balance owed on the renewal date, your new interest rate, how long your new term length is, your new payment schedule, and ether any fees have been applied.
If you have any questions, contact one of our local branches.
