Has your bank called you to renew your mortgage? Are you wondering if it’s a good time to get out of your current mortgage term to qualify at a lower rate elsewhere?
In this article, we attempt to answer many of the questions you may be contemplating around the topics of renewal, transferring, or refinancing your mortgage:
Key Mortgage Terms
What is a Mortgage Renewal?
If your mortgage loan is not paid off at the end of your mortgage term, your lender may offer you a renewal package – complete with term and rate options. If you choose to accept and wish to stay with your current lender, you’ll simply need to agree to the new term and interest rate – to cover the remaining amount.
But are these the best rates and terms for you?
What are your other options? …. (This is where you can potentially save money!)
What does it mean to Switch or Transfer your Mortgage?
Should you be unhappy with your mortgage provider at the time of renewal and wish to move your mortgage to a different lender or bank, the process to complete this change is called a switch or transfer. This is a great option for those looking for better rates and support.
You may make this move during your mortgage term – but it may be costly as you are breaking a contract. Or, you can wait until your term is up for renewal – which will be much more affordable.
Note: it is worth checking the numbers in your situation. If the penalty is minimal, and you are able to get a better rate, it can be to your advantage.
One caveat with the switch/transfer is that you cannot change the mortgage amount OR the amortization.
(If you wish to change either of these, it is considered a refinance)
What is a Mortgage Refinance?
Refinancing is the process of renegotiating your mortgage loan by increasing the amount and changing the conditions of your mortgage term. This is typically done to consolidate debt, access equity in your home, and potentially unlock lower interest rates.
So, which is your best option? That depends:
Mortgage Renewal Trends In 2018
Did you know that 47% of mortgages are coming up for renewal in 2018?
According to CIBC Capital Markets, nearly half of all existing mortgages in Canada will need to be renewed this year – much more than the typical 25 to 35% each year.
In his report, Ian Pollick, Executive Director of CIBC, says this is a result of the various risk-preventing regulatory changes and rising house prices that have rolled out over the past few years:
“Over the past two to three years, as home prices have risen unchecked, you’ve had people trying to get into the housing market unable to afford longer term mortgages and taken out short-term mortgages… And in 2018, everything is falling on top of one another.”
So – how do things differ for those who took out mortgages after the rule change vs. before the rule change? Let’s dive in:
Mortgages Taken Out After The Rule Change:
The Stress Test
As of January 1st, 2018, uninsured borrowers have had to take part in a “stress test.” The mortgage stress test consists of a process to identify if a borrower could afford to pay back their loan should the interest rates rise.
These Canadians will have to qualify at the Bank of Canada’s qualifying rate – the standard five-year benchmark rate or 2% more than the contract rate they originally qualified for…whichever is higher.
If it appears that the borrower can handle the financial stress of the rate increase, they will be approved for refinancing or switch/transfer. If it appears that they cannot handle the stress of a rate increase, they will not be approved for refinancing or switch/transfer.
Note: the stress test is not applied to renewals with the same lender
For more information, please read our article ‘What You Need To Know About The Mortgage Stress Test.’
Mortgages Taken Out Before Rule Change:
If you were able to qualify for a mortgage before the changes, your upcoming renewal would be much easier. However, one challenge you may face is finding the best available rate, as you may no longer qualify to move your mortgage to a new broker or bank under the new rules.
Switching & Refinancing
When it comes to a basic mortgage switch/transfer on a standard charge mortgage, the process is quite simple and can be cost-free – if your mortgage is up for renewal and the amount and amortization will be remaining the same.
However, if you were looking for additional funds, this would be a refinancing situation.
Mortgage Penalties For Transferring
If you are transferring your mortgage out of a bank before your mortgage term has ended, you will be charged a penalty, which is designed to recoup the money the bank will lose by you to taking your mortgage elsewhere. This penalty can be three months of interest or higher. (Be aware of this!)
Is Transferring Your Mortgage Worth It?
If a lower mortgage rate is what you’re after, it may be worth paying the penalty for. However, each case is different, and it’s important to talk to a mortgage broker to determine your best option.
Refinancing Your Home
Under the new rules, Canadian homeowners can still refinance up to 80% of the value of their property. However, these individuals will have to pass the same stress test at the five-year benchmark rate or 2% higher than the lender contract rate.
Contact The Mortgage Station
We’re here to help!