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Will Your Mortgage Renew Automatically in Canada?

In Canada, when a borrower takes out a mortgage loan to purchase a property, the loan is typically secured by a written agreement called a “Mortgage.” The borrower agrees to repay the mortgage using monthly payments consisting of interest and principal. The period used for repayment of principal is referred to as the term.

In most cases, borrowers will sign a mortgage for a term of 5 to 25 years. However, once the borrower has paid down the principal to 80% of the property’s original value, he may be able to renegotiate his loan with his lending institution to obtain lower monthly payments.

What Does Mortgage Renewal Mean?

Renewing a mortgage means that the borrower will take out another written agreement with the lending institution, paying off the original loan and signing up for a new term to pay down the principal. Each time this is done, borrowers may be charged fees to obtain their new mortgage.

When Does Mortgage Renewal Occur?

When you renew your mortgage depends on whether or not it has an automatic renewal clause or “option.” At least 30 days before the expiry of your current mortgage, you should receive notification from your lending institution regarding its renewal policy. Borrowers are typically informed if their mortgages will automatically renew subject to certain conditions. These conditions include:

  • The property value increases;
  • The creditworthiness of the borrower;
  • The property type; and,
  • Changes in market conditions.

Suppose your lender does not include an automatic renewal clause in its mortgage agreements. In that case, borrowers are required to make arrangements with their lending institution before the expiry date of their mortgages to obtain new loan terms. Failure to do so may result in a default on the original agreement.

Borrowers who fail to pay their outstanding debts will be subject to foreclosure proceedings by their lenders. They will also lose any accumulated equity in the property, which generally reverts to the lending institution.

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What Happens When Your Mortgage Expires?

If you have a fixed-rate term with no options or renewals attached, your mortgage will expire at maturity. That means that your lender cannot ask you to renew or extend the term of your agreement, and for this reason, a fixed-rate mortgage is a good choice if you think that you might want to move from the property in question before the end of the term.

When Does Your Mortgage Renew Automatically?

During the fixed-rate term of your mortgage, you may wonder what will happen to your rate and monthly payments if they aren’t changed when your agreement expires. That is a good question and one that your lender’s automatic renewal clause can answer.

When Does Your Mortgage Not Renew Automatically?

Most mortgages contain an automatic renewal clause with terms that range from six months to five years. The length of time will vary depending on the type of property involved, how much has been paid off on the existing loan, the borrower’s creditworthiness, and market conditions.

For example, borrowers with “substantial equity” in their homes may have a renewal term of 10 years, while those with no equity usually have to renew for five. With this being said, the bank will not provide a more extended renewal option than the borrower needs or wants.

Borrowers who want a definite expiry date can choose a five-year option and then renegotiate the terms of their loans at maturity. Those who prefer to pay off their mortgages earlier can opt for shorter terms, such as 18 months or two years.

What Happens During Your Mortgage Renewal?

Once your mortgage has been automatically renewed, you will be required to sign another agreement with your lending institution. This document will list all of the original loan details along with the new interest rate, repayment date, amortization period, and other information.

The bank will not automatically save you money on your new rates or terms. To receive the best possible renewal package from your lender, you must call the institution during this time to negotiate a more competitive interest rate and term.

Let’s say that your mortgage is renewed at a higher rate than that on the original agreement. Then, it may be possible for you to refinance with another financial institution within a short period following its expiration. 

That particular strategy may spare you some of the higher associated costs involved with breaking before maturity, as well as those incurred from being charged an early termination fee by your current lending institution.

How Can Your Mortgage Renew Automatically in Canada?

If you need a new mortgage, consider how it will renew automatically in Canada. Some lenders offer personalized renewal terms tailored to your specific requirements. These may include:

  • The ability to lock in interest rates;
  • Mortgage renewal guarantees; and,
  • Loans with flexible terms.   

Pros and Cons of Automatic Mortgage Renewal

There are advantages and disadvantages for borrowers who choose to have their mortgages automatically renewed. For example, suppose you are out of the country or plan on moving far away from your property before the end of your fixed-rate term. In that case, automatic renewal may be beneficial because it reduces one more element that could prevent you from renewing.

On the other hand, if you expect rates to fall over the next few years, it might make sense for you not to renew your mortgage but instead opt for a shorter term to take advantage of lower interest rates. In this case, opting out of automatic renewal will give your lender less bargaining power when terms with you at renewal time.

The Bottom Line On Automatic Mortgage Renewal

Keep in mind that there may be a cost involved with breaking your mortgage agreement before maturity, even if your lender does not renew it automatically. However, you can avoid this expense by calling your lender before the automatic renewal date and negotiating a better deal.

If you are looking to acquire home loans, more information on Mortgage in Canada, loan rates in states of Canada, etc. let Best Mortgage Online help you.

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