When you took out your current mortgage, you were required to make a number of key decisions, such as the type of rate you wanted – fixed or variable – the amortization period, whether it was open or closed as well as what term you wanted.
A mortgage term represents the length of time, usually in years, during which you agree to abide by the conditions of the mortgage. Mortgage terms are typically relatively short, with five years being the most common.
As the end of the term approaches, you have another set of decisions to make as the remaining balance on the mortgage will need to be renewed, refinanced or paid in full. For renewals, you can stay with your current lender or transfer your mortgage to a different lender. Or you may decide that you want to refinance the mortgage and tap into your home’s equity.
It’s important to talk to your mortgage agent before your term is up to determine what mortgage option makes the most sense to you based on your current and future financial situation and needs. Following are your choices to make as your renewal time approaches.
Renewing with current lender
This is the most convenient route to take as you aren’t required to requalify. If you’re satisfied with the rate and conditions being offered, you can sign the renewal letter and you’re done. If your financial situation has adversely changed over the course of the initial term and you’re not sure whether you would be approved with a new lender, it may be a good idea to stay put. Also, by maintaining your mortgage with your current lender, you won’t be required to pass the federal government stress test, which is set at a rate two percentage points higher than the one your lender offers.
If you do remain with your current lender, you may not have the leveraging power of negotiating your rate, which could end up being higher than if you went elsewhere. Lenders are anticipating that you won’t want the hassle of switching to a new institution – going through the approval process and producing the required documentation. It’s important, therefore, that you ask for a better rate or different terms than those that are presented in your renewal statement, if they aren’t satisfactory. Lenders don’t want to lose your business, and a better rate and more flexible terms could save you thousands of dollars in the long run.
Switching lenders
The main reason people transfer their mortgage to a different lender at the time of renewal is to benefit from a better rate and/or more favourable mortgage terms/conditions. The money you save with a lower interest rate will allow you to reduce your amortization period and pay off your mortgage faster.
It’s important to note that, when switching lenders, you may be required to pay the appraisal and legal fees, and other administrative costs so you need to determine whether the better rate and conditions are worthwhile. Also, keep in mind that you’ll be required to qualify at the stress test rate.
Tapping into home equity
Another option to consider is taking on a new larger mortgage in order to access equity in your home to consolidate debt, take advantage of lower interest rates and improve cashflow, renovate your home, send your kids to school, buy an investment property or use how you choose.
Accessing home equity when your term is up for renewal makes the most sense as you won’t be charged to break your current mortgage and refinance into a new one. This can save a significant amount of money in prepayment penalties.
Keep in mind, however, that the larger the mortgage you have, the longer it will take you to become mortgage free. Your home represents a great finance tool, but you want to ensure you can handle the new payments. As well, you may be required to pay appraisal and legal fees, and other administrative costs.
Have questions about what to do when your mortgage term is ending? Answers are a call or email away!