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.
What is a 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.
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
Most Canadian homeowners choose to renew their mortgage when the term expires rather than paying off the full balance, which is impossible 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.
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.
When to Start the 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 3 key timing considerations for Canadian mortgage renewal:
- Renewal statement – If your lender is a 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.
Should I Renew My Mortgage Early?
Renewing your mortgage before your term expires is known as early mortgage renewal. Most lenders will allow you to renew without penalties 4 to 6 months before maturity.
Early renewal makes the most sense when you can secure a lower rate than your current mortgage rate. But if an early offer is higher than your existing rate, it may pay to wait closer to maturity to renew in hopes of improvement.
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.
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.
Why Renew a Mortgage in Canada?
There are 5 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.
- 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. This equity can be accessed later via a home equity line of credit (HELOC) if needed.
- 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.
Risks when Renewing Your Mortgage
While most Canadian homeowners successfully renew their mortgage each term, it is essential to be aware of 4 potential challenges and risks:
- Mortgage Renewal is Not Guaranteed: The lender could deny your renewal if your financial profile has deteriorated substantially – 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.
- Mortgage Stress Test: If you decide to switch lenders, you will be subject to a mortgage stress test. Being stress tested could potentially lower the mortgage amount the new lender approves for you.
- Discharge and Closing Costs: When switching lenders at renewal, discharge statement fees, legal fees, and appraisal costs are typical. Carefully account for these charges in any calculation comparing potential savings from a new lender’s lower interest rate.
What to Consider Before Renewing?
Before entering a new mortgage term, take time to consider your needs and goals, both short and long-term:
- Will your income and expenses change significantly?
- Do you plan major purchases like a renovation?
- When do you hope to pay off your mortgage?
- Does prepayment flexibility or accelerated bi-weekly payments appeal to you?
- How has your experience been with the current lender?
- Do you need mortgage insurance or want to add it?
Asking these questions will help align the mortgage features and term length with your personal finance plans.
What if My Mortgage Renewal is Denied?
If your lender declines to renew your mortgage, it’s likely due to missed or inconsistent payments, credit damage or other financial issues that make you appear high risk.
If renewal is denied, potential options include:
- Re-applying with documentation of improved finances
- Seeking a mortgage from alternative or private lenders
- Downsizing your home to lower mortgage costs
- Selling your home to eliminate the mortgage
While denial is uncommon for borrowers who’ve made timely payments, it does happen. Having a backup plan can help avoid foreclosure.
Tips for Getting the Best Mortgage Renewal Deal
Follow these 7 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 7 key steps in the Canadian mortgage renewal process:
- Receive renewal statement from existing lender 21+ days before maturity
- Thoroughly assess options starting 4-5 months prior
- Research competitive rates, features, and costs across lenders
- Apply for early renewal 4-5 months out to lock-in rates
- Compile multiple offers to use as negotiation leverage
- Decide whether to renew with the existing lender or switch providers
- 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.
Don’t tackle your next mortgage renewal alone. Contact Best Mortgage Online today, and let us guide you through a smooth renewal process.
FAQs
What happens if you don't renew your mortgage on time?
If you don't renew, your lender may force you into an automatic renewal at a potentially higher rate or require the mortgage to be paid in full immediately. Not renewing is risky.
Can you be denied a mortgage renewal by your lender?
Yes, lenders can deny renewal if you've missed payments, have a poor credit score or high debt ratio that makes you look high risk.
What happens when your mortgage term is up?
When your term expires, you either need to renew your mortgage with the same lender or a new one, pay off the balance in full, or potentially face foreclosure.
Can you pay off your mortgage at renewal?
Yes, you can pay off the remaining principal in full at renewal to avoid renewing the mortgage. However, prepayment penalties may still apply if it's before the maturity date.
Do I need to requalify when renewing my mortgage?
If you stay with the same lender, requalification is usually not required. However, switching lenders will involve a full application and approval process.
Is mortgage renewal the same as refinancing?
No, renewal extends your current mortgage, while refinancing replaces your mortgage with an entirely new loan. Refinancing involves more costs.