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Mortgage Renewal in Canada: Everything You need to Know

A guide to mortgage renewal in Canada – how it works, when to start, documentation required, risks and tips to secure the optimal renewal deal.

Renewing a mortgage is a regular part of homeownership in Canada. With most mortgages having terms of 5 years or less, homeowners can expect to go through the renewal process multiple times over the lifespan of their mortgage. This presents an opportunity for mortgage holders to reevaluate their situation and make changes to get the best deal.

In this comprehensive guide, we will walk through everything you need to know about Mortgage Renewal in Canada for 2024 and beyond – from what a mortgage renewal entails and when the process begins to considerations around rates, risks, costs and more.

Whether you want to renew with your existing lender or switch to a new provider, this guide will equip you with the critical information needed to make the wisest financial decision for your needs.

What is Mortgage Renewal?

What is Mortgage Renewal
What is Mortgage Renewal?

A mortgage renewal involves replacing your existing mortgage contract with a new agreement from either your current lender or a new provider. It happens when the original mortgage term expires.

For example, if you obtained a 5-year fixed rate mortgage in 2019, you would face renewal in 2024 when your 5-year term expires. Based on current mortgage trends, Canada’s average mortgage is renewed approximately 3-4 times over the full amortization period. This means most homeowners must go through the renewal process multiple times while paying their mortgage.

In Canada, a 25-year amortization period is most common, which refers to the total time it would take to completely pay off your mortgage if all payments are made on time. However, mortgage terms themselves are much shorter, typically 5 years or less.

At the end of each term, the mortgage holder has an important decision to make before the existing term expires:

  • Renew or renegotiate mortgage with the same lender
  • Switch lenders to try to find better mortgage terms
  • Pay off the remaining mortgage principal balance in full

The vast majority of Canadian homeowners choose to renew their mortgage when the term expires rather than paying off the full balance, which is not possible for most. Renewing rolls the mortgage into a new term, allowing the homeowner to maintain their financing and continue paying the principal over the amortization schedule.

Why Renew a Mortgage in Canada?

There are several key benefits to renewing a mortgage in Canada rather than trying to pay off the entire principal at the end of the term:

  • Maintain home financing – Most homeowners cannot fully pay off their mortgage after 1 to 5 years. Renewing the mortgage allows them to maintain their financing.
  • Lower regular payments – With amortization periods of 25+ years, keeping monthly mortgage payments affordable is possible. Trying to pay off the balance in a short 1 to 5-year timeframe would require unaffordable lump-sum payments for borrowers.
  • Take advantage of low rates – When interest rates are low, renewing your mortgage allows you to lock in a low fixed rate for the renewal term and pay less interest over time.
  • Access home equity later – Renewing grows your home equity each year as more of the principal is paid off. If needed, this equity can be accessed later via a home equity line of credit (HELOC).
  • Avoid prepayment penalties – Paying off a closed fixed-rate mortgage before maturity can result in hefty prepayment penalties of 3 months of interest or more. Renewing avoids these costly early repayment fees.
  • Flexibility to change terms – Renewing allows renegotiating payment schedules, lock-in rates, and other terms rather than being locked in long-term.

Read more: Should I get a Mortgage rate lock?

When to Start the Mortgage Renewal Process?

Time to start mortgage renewal process
Time to start mortgage renewal process

The timing of when you start the mortgage renewal process is crucial in Canada. You should give yourself plenty of time to thoroughly explore your options and make the best financial decision.

Here are some key timing considerations for Canadian mortgage renewal:

  • Renewal statement – If your lender is federally regulated financial institution, they must provide you with an official mortgage renewal statement at least 21 days before your existing mortgage term expires. Review this statement carefully as soon as you receive it. [Source]
  • Start shopping – Industry experts recommend evaluating your mortgage renewal options at least 120-150 days (4-5 months) before your maturity date. This gives you ample time to shop around with different mortgage lenders and brokers.
  • Finalize in the last 30 days – It is best practice to finalize your mortgage renewal within 30 days before maturity when you are protected from any rate changes or increases. Use this final month to negotiate the best possible deal.

Early renewals option

Deciding between early or standard mortgage renewal depends on your financial situation and market rate forecasts. Most major lenders offer early renewal options, usually up to 6 months before maturity.

(Source: https://www.nbc.ca/personal/advice/home/mortgage-early-renewal.html)

This option allows borrowers to lock in rates ahead of any potential increases, offering payment certainty and protecting against being denied renewal later on. However, standard renewal closer to the maturity date preserves flexibility if rates decline, enabling borrowers to negotiate with multiple lenders and potentially secure better terms.

There is no one-size-fits-all answer – look at market projections and your needs to determine if the benefits of early renewal justify giving up flexibility. Starting the renewal process 4-5 months out gives adequate time to assess both early and standard renewal options.

How to Renew Your Mortgage in Canada?

When your mortgage term maturity date is approaching, you generally have three options in terms of how to renew your Canadian mortgage:

  • Automatic Renewal

Some lenders will automatically renew your mortgage if you take no action. However, this passive approach can sometimes result in missing out on better market rates or terms that may now be available. Industry experts recommend homeowners take a proactive approach.

  • Renegotiate with Your Current Lender

Before renewal, you can actively renegotiate your mortgage rate and other terms directly with your existing lender. Highlight if you’ve been a good customer and make all timely payments. Bring up competing offers from other lenders as leverage to see if your current provider will offer a discounted rate.

  • Switch Lenders

Actively shopping around and comparing renewal offers from other lenders and mortgage brokers can help secure a competitive deal. You’ll need to reapply and meet the new lender’s approval criteria. Discharge fees generally apply. Make sure to factor those costs into any savings calculations when comparing lenders.

Requirements for Renewing Your Mortgage

If you are switching lenders at renewal time, the new lender will require similar documentation as you had to provide when you originally applied for a mortgage:

  • Income verification: Recent pay stubs, T4s, CRA notice of assessments
  • Down payment funds: Statements demonstrating you have enough savings for a minimum down payment
  • Credit check: Signed authorization form allowing lender to pull your credit report
  • Property appraisal: For new lenders, an appraisal may be needed to confirm the current home value

In addition, you’ll need to meet the new lender’s debt-to-income ratios and minimum credit score requirements to be approved. If renewing with your existing lender, generally only signed renewal paperwork is required if approved.

Challenges and Risks when Renewing Your Mortgage

While most Canadian homeowners successfully renew their mortgage each term, it is essential to be aware of some potential challenges and risks:

  • Mortgage Renewal is Not Guaranteed

There is always a possibility the lender could deny your renewal. This may happen if your financial profile has deteriorated substantially since initially getting your mortgage – for example, a drastic reduction in income, missed mortgage payments, or a very low credit score.

  • Limited Options if Renewal Denied

If your current lender denies your renewal application, you may have limited options other than just accepting whatever renewal terms the existing lender offers. This can happen if you cannot find financing from any other provider after being declined by your current lender.

  • Mortgage Stress Test

If you decide to switch lenders rather than renew with your existing provider, you will be subject to mortgage stress test. This requires you to qualify at a higher benchmark rate (currently 5.25%) to assess affordability, even if you are renewing with the same mortgage balance. Being stress tested could potentially lower the mortgage amount you are approved for by the new lender.

  • Discharge and Closing Costs

When switching lenders at renewal, discharge statement fees, legal fees, and appraisal costs are typical. Discharge fees generally cost $200-$500 per mortgage [10]. Carefully account for these charges in any calculation comparing potential savings from a new lender’s lower interest rate.

Key Factors to Consider when Renewing Mortgage

When going through the mortgage renewal process, make sure to thoroughly evaluate these key factors:

  • Financial Goals – Consider your overall financial situation and goals. Could you increase your payment and pay off your mortgage faster? Do you need access to your home’s equity for other plans?
  • Desired Mortgage Features – Outline the features most important to you for this next term. Look closely at prepayment options, penalties, payment frequency, loan portability, and other term details that suit your plans.
  • Lender Dissatisfaction – If you have been unhappy with your current lender’s customer service, lack of flexibility, or inconvenient processes, renewing may present a good opportunity to switch providers.
  • Interest Rate Analysis – Carefully assess both prevailing interest rates in the marketplace along with expert forecasts on if fixed or variable rates make sense given where rates are projected to move in coming years during your renewal term.
  • Cost-Benefit Analysis – Factor in all closing costs and discharge fees you will incur if switching lenders against the potential interest savings from a new lender’s lower rate over your renewal term. Crunch the numbers.

Renewal, Refinance and Other Considerations

There are some important differences between renewing an existing mortgage and refinancing your home. Here are some key points:

  • Renewal maintains the same balance – A mortgage renewal keeps the same loan amount as your previous term. Refinancing involves increasing your overall mortgage loan amount.
  • No need to requalify for renewal – You do not undergo new credit checks or stress testing when renewing with the same lender. Refinancing requires fully requalifying for the higher mortgage amount.
  • Lower costs to renew – Renewing has lower out-of-pocket costs for legal fees and appraisals. Refinancing costs more, given the higher loan amount.
  • Better rates on renewal – Renewal rates are typically lower than refinance rates offered by lenders in Canada.
  • Flexibility to alter terms – Renewals allow you to adjust amortization periods, payment schedules, and lock-in rates while refinancing locks you into new terms.

Other Important Considerations

Beyond just comparing renewal and refinancing, some other key considerations include:

  • Renewing with Existing Lender vs. New Lender – Renewing your existing mortgage with the same lender is simpler logistically but may not offer the best rate. Switching lenders involves an application and stress test but could secure better terms.
  • Open vs. Closed Mortgages – Switching lenders is easier with an open mortgage as there are no early termination penalties. Breaking a closed mortgage term can lead to hefty interest rate prepayment penalties.
  • Provincial and Federal Regulations – Mortgage regulations like renewal statements, maximum amortization lengths, and minimum down payments are federally mandated. Property taxes, land transfer taxes, and condo buyer protections are provincially regulated.

Tips for Getting the Best Mortgage Renewal Deal

Get the Best Renewal Deal
Get the Best Renewal Deal

Follow these proactive tips when going through the mortgage renewal process to secure the optimal deal:

  • Start the Process Early – Ideally 5-6 months out, thoroughly assess your renewal options across lenders. Consider applying for early renewal 4-5 months out to lock in rates if they trend upwards.
  • Work with a Mortgage Broker – Mortgage brokers have access to rates and products across dozens of lenders. Their expertise can help identify the most competitive renewal offer for your specific situation.
  • Take Out Shorter-Term Fixed Rate – Opting for a shorter 2-3 year fixed rate term will allow you to renegotiate your mortgage sooner when rates eventually decrease again in the future.
  • Make Lump Sum Payment Before Renewal – If possible, making a lump sum payment before renewal to lower your principal can help secure a lower rate from lenders by improving your loan-to-value ratio.
  • Compile Competing Offers – Get multiple rate quotes from lenders and brokers to leverage these competing offers when negotiating with your existing lender for a discounted rate.
  • Calculate the Total Costs – Crunch the numbers to tally up total costs – don’t just look at the rate. Factor in discharge fees, legal costs, and lost flexibility when comparing options.
  • Understand the Impacts of Switching – If switching lenders, understand the costs, inconvenience, and impacts of doing so against the potential interest savings over your term from a lower rate.

Key takeaways: Mortgage Renewal in Canada

To summarize, here is an overview of the key steps in the Canadian mortgage renewal process:

  1. Receive renewal statement from existing lender 21+ days before maturity
  2. Thoroughly assess options starting 4-5 months prior
  3. Research competitive rates, features, and costs across lenders
  4. Apply for early renewal 4-5 months out to lock-in rates
  5. Compile multiple offers to use as negotiation leverage
  6. Decide whether to renew with the existing lender or switch providers
  7. Finalize renewal within the last 30 days before maturity

Renew your Mortgage with Confidence

Renewing your Canadian mortgage can seem complicated, but it mustn’t be stressful. By starting the process well in advance, thoroughly researching your options, recognizing your financial needs, and seeking guidance from a mortgage professional, you can feel confident about your decision to renew.

With the right planning and support, you can renew into mortgage terms that maximize savings and align with your financial situation. Paying attention to mortgage renewals will save you thousands of dollars over the lifetime of your loan.

The mortgage experts at Best Mortgage Online have helped thousands of Canadian homeowners navigate the mortgage renewal process with ease and confidence. From early rate lock-ins to negotiating with your existing lender to facilitating hassle-free lender switches, we manage every detail tailored to your financial situation.

Don’t tackle your next mortgage renewal alone. Contact us today to learn how we can guide you through a smooth renewal process while maximizing savings.

FAQs

How early can you renew your mortgage in Canada?

Most lenders allow early renewal 4-6 months before maturity to lock in rates without penalty.

What are the risks of renewing your mortgage?

Risks include renewal being denied, failing to pass the stress test when switching lenders, and discharge/closing costs.

When should you start the mortgage renewal process?

Start 4-5 months before maturity to explore options and rates. Apply for early renewal 120-180 days out.

What documents do you need to renew your mortgage?

If switching lenders, you will need proof of income/down payment and a credit check. Usually, it is just renewal paperwork with an existing lender.

Can the lender deny your mortgage renewal?

Renewal can be denied if your financial profile has deteriorated significantly since origination.

Do you have to pass the stress test when renewing your mortgage?

Yes, if you switch lenders. Renewing with your existing lender doesn't require passing the stress test again.

Should you renew your mortgage early?

Early renewal locks in rates before increases but limits flexibility. Evaluate rate trends and personal situations.

Is it better to renew or refinance your mortgage?

Renewal keeps the same balance at a lower cost. Refinancing borrows additional funds but requires full requalification.

What fees are charged when you switch mortgage lenders?

Discharge, legal, and appraisal fees. The discharge alone is $200-500. Factor fees into savings calculations.

How do you get the best mortgage renewal rate?

Start early, work with a broker, provide competing offers, negotiate with lenders, and calculate total costs.

Article Sources
  1. Renewing your mortgage – canada.ca
  2. Mortgage renewal process – ratehub.ca
  3. How to Renew Your Mortgage? Rates & Tip – freedomcapital.com
  4. What is a Mortgage Renewal? – firstfoundation.ca

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