Until you pay off your mortgage balance, you must renew your mortgage when your current mortgage term ends. Whether you choose to renew with your current lender or switch to a new one, factors such as rising interest rates and evolving financial goals can make the mortgage renewal feel overwhelming.
You can navigate a higher monthly mortgage payment by shopping for the best rates and terms and negotiating with mortgage lenders.
Here’s what you need to know about a mortgage renewal, how the process works and what steps you can take to manage an increase in payments.
What is a mortgage renewal?
Mortgage renewals are a normal part of homeownership in Canada. When your current mortgage term ends, and you still have a balance remaining on your loan, you will need to do a mortgage renewal. For example, if you signed a 5-year mortgage contract with a lender in 2020, the mortgage term will end in 2025. With a balance remaining, you need to renew your mortgage. Mortgage renewals often come with new rates and terms, depending on what your lender offers and what you negotiate.
Key mortgage renewal terms to know
Before you renew your mortgage, here are the key terms you need to know.
Interest rate: The cost of borrowing money, expressed as a percentage.
Fixed mortgage: A mortgage with an interest rate that stays the same for the entire term.
Variable rate: A mortgage with an interest rate that can change during the term.
Lender: The bank, credit union, or private lender providing your mortgage loan.
Amortization: The process of paying off your mortgage loan over time through regular payments.
Interest rates play a significant part in mortgage renewals. Higher interest rates usually mean your periodic mortgage payments may be higher. The Bank of Canada has raised its policy interest rate several times in recent years to combat rising inflation, which has led to higher mortgage rates. Renewing your mortgage in recent times may result in your payments increasing notably. For some, this increase can be hundreds of dollars more per month.
The mortgage renewal process in Canada
Now that it’s time to renew your mortgage, here’s what the renewal process looks like:
- Notice from your lender: Your mortgage lender would send you a renewal statement at least 21 days before your maturity date. This statement includes your remaining balance, current interest rate, payment amount, and the new proposed terms.
- Review your options: When you receive your notice of renewal, take the time to compare mortgage rates and terms from other lenders, credit unions, and mortgage brokers to find comparable or better deals.
- Negotiate: After reviewing your options and getting offers from mortgage lenders and brokers, negotiate for the best rate. Lenders are often willing to match or beat competitor offers to keep your business. It is essential to note that the rates are not the only aspect to negotiate; you can also negotiate an option to pay off your mortgage early when you finally have more financial resources, without incurring penalties. You can also negotiate your mortgage amortization period and monthly payments.
- Qualify for a new mortgage: It’s often easier to stay with your current lender, especially as switching lenders may mean a new mortgage approval and applying the stress test rules at a higher qualifying rate.
- Finalize and sign: Once you’ve chosen your lender and terms, sign the renewal agreement. Your new mortgage term begins, and your payments continue under the new conditions.
Mortgage renewal tips: How to prepare
Facing your first or next mortgage renewal? Here are actionable tips to help you know what to look out for and get the best outcome:
Start early
Don’t wait until your maturity date is just days away. Begin researching your options at least four months before your renewal. This gives you time to shop for the best mortgage rate and negotiate terms.
Shop around for the best rate
Your lender’s first offer may not be the best. Compare offers from banks, credit unions, and private lenders. A mortgage broker can help you access a broader range of rates and lenders, sometimes including exclusive deals.
Consider your amortization period
If your payments are about to jump, extending your amortization period can help lower your monthly payment. For example, moving from a 20-year to a 25-year amortization spreads out your loan, reducing each payment. However, this means you will pay more interest over time.
Decide between fixed and variable rate
Should you choose a fixed mortgage or a variable rate for your next term? Fixed rates offer stability, while variable rates may be lower but can change. Learn more about fixed vs. variable mortgages.
Review your financial goals
Your financial situation may have changed. You may want to pay off your mortgage more quickly, or you need to free up funds for other priorities. Consider making a lump sum payment at renewal or adjusting your payment frequency to match your financial goals.
Don’t forget the stress test
If you switch lenders or increase your loan amount, you’ll need to pass the federal stress test. This means qualifying at the higher of the Bank of Canada’s benchmark rate or your contract rate plus 2 percent. Make sure you are prepared for this step.
Watch for renewal fees and penalties
Some lenders charge fees if you switch, renew early, or break your mortgage. Learn more about mortgage penalties and when early renewal is worth it.
What if you can’t afford your new payment?
With higher interest rates and tighter budgets, some Canadians may struggle to afford their renewed mortgage payments. Here’s what you can do:
Talk to your lender
If you’re worried about making payments, contact your lender as soon as possible. They may offer solutions like extending your amortization period, switching to interest-only payments temporarily, or restructuring your loan.
Consider a lump sum payment
If you have savings, making a lump sum payment at renewal can lower your balance and reduce your monthly payment.
Explore alternative lenders
If your bank or credit union won’t approve your renewal, private lenders may be an option. Note that private lenders often have higher mortgage rates. Private lenders can be a last resort if you don’t qualify elsewhere, but always compare costs and terms carefully.
Consider using a mortgage broker
A mortgage broker can help you compare rates and terms from multiple lenders, including banks, credit unions, and private lenders. They can also advise you on passing the stress test, negotiating with lenders, and finding the best fit for your needs.
Mortgage renewal and mortgage insurance
If your down payment was less than 20%, you likely have CMHC mortgage insurance. This insurance stays with your mortgage until you reach 20% equity. If you switch lenders at renewal, you may have to pay a new insurance premium. This new premium could be enough to sway your decisions, so look into any changes before making your final decision.
Key takeaways
When facing a mortgage renewal with the end of your current mortgage term, it is important to start searching early and talking to lenders about renewal options. With high interest rates, start early and take the time to research, compare, and negotiate the best deal that aligns with your financial goals. If you’re struggling with payments, talk to your lender early and explore all your options.
High credit card payments making it difficult to keep up with your new mortgage payment? We can help! Talk to one of our Credit Counsellors to find out how.
