In recent times, we have witnessed a rigorous phase of volatility in the mortgage market, considering the ebb and flow of interest rates. This has left many Canadians contemplating if they should opt for an early mortgage renewal. While some have a routine approach towards mortgage renewal, others may want to be done with it as soon as possible, but what is the best way forward?
You can also look at the article here to find out whether or not early renewal is the way for you to go and capitalize on this relatively essential window of money-saving in getting ahead for your financial gains.
Before we get into the niceties, let’s understand the foundational facets of mortgage renewal.
What Does It Actually Mean?
When you avail of a mortgage, your legal obligation regarding the repayment is for a specific period, which can range from five months to five years or more. This is known as your “mortgage term” and must be renewed after the expiration of the specific term.
If your mortgage contract is with a federally regulated institution, you will receive the intimation of expiry, i.e., your renewal statement of the existing term, 21 days before such expiration. Depending on your consented communication medium, your lender may convey this to you via paper or electronic statements.
The lender may also inform you of non-renewal before 21 days to the expiration of the current term. In such a case, you will have to settle the outstanding balance in full.
Essential Of The Renewal Statement
Your renewal statement must contain the following:
- the outstanding balance at the renewal date;
- the rate of interest to be applicable;
- the term of the mortgage;
- the installments for payment;
- any other charges or fees applicable.
It is to be noted that the renewal statement must contain the disclaimer of non-increase in the interest rate during the term until your next renewal date.
The Intricacies Of Early Renewal
Lenders usually allow you to renew the term early, without penalty, within 121 to 180 days before your renewal date. But this doesn’t necessarily prove to be the best solution for most borrowers.
Lenders offer early renewal only in certain circumstances. This is because many lenders reserve rates for 120 days before the date of disbursement. This simply means one thing: if you are willing to explore other options and you are left with 180 days before your renewal date, opting for and switching to a different lender will trigger a penalty.
This way, the lender implicitly influences the borrower to sign the early renewal without inviting any competition from the cutting-edge market.
It is also observed that an early renewal proves beneficial to the borrowers only when they are in a rapid rate-increasing market. This is because, typically, the existing lender agrees to renew the mortgage at the current rate before the rates are sky-rocketing again.
But, if the borrower seeks to get the current rate from any other lender, he will have to bear the penalty of breaching the contract with the existing lender.
A Look At The Potential Future Penalties
The amount of such a penalty varies from lender to lender. The cost is often dependent on factors such as:
- the type of mortgage;
- the outstanding balance/ remaining amount;
- the period left for the expiration of the existing term;
The early mortgage penalty is essentially calculated through one of the below-mentioned methods:
- In the first method, the lenders typically charge the interest you were supposed to pay at the original rate for three months.
- In the second method, Interest Rate Differential (IRD) is calculated. This is commonly used while dealing with fixed-rate mortgages and is considered a bit complex, which drives the homeowners to sit with a mortgage broker and scrutinize the numbers to determine the amount due for a penalty.
Additional Considerations Before Settling With Early Renewal
The moment you sign the mortgage contract, your financial position takes a shift, thereby changing your priorities. Therefore, while renewing your mortgage, it becomes crucial to avail a financial option that accommodates your current financial standing, long-term plans, and in a way, your lifestyle. Here are a few things that one needs to consider before renewing the mortgage term.
Assess Your Mortgage Needs
The first step undoubtedly involves assessing your mortgage needs. Then, upon the expiration of your current terms, you need to scrutinize and find the right mortgage. For such an examination, you will have to keep in mind the following:
- Whether you are in content with the services facilitated by your current lender;
- Whether you have the budget leverage—in case you decide on increasing payments for paying off sooner to save on the interest;
- Whether it is time for you to modify the payment frequency.
The Income-Expense Ratio
While considering renewal, seek shifts in your income influx and expense outflow. For example, an increase in income owing to a promotion or raise will enable you to pay off your debt faster with frequent payments.
Similarly, a change in income owing to financial loss or perhaps retirement will add to your expenses, which can determine whether you can afford the ongoing payments towards your mortgage.
Lastly and most importantly, it is fruitful to explore the marketplace before coming to the renewal conclusion. While shopping around in the market, you can weigh and compare options and methods with your existing plan to save money.
However, such exploration shall begin 120 days prior to the end of your term. This way, all the other lenders, along with your existing one, can compete for your business, and you might end up with a good deal for your pocket.
The benefits accruing from an early renewal crucially depend on the rates that are offered to you. If the renewal rates are lower than your current or the anticipated ones, renewing seems potentially a money saver.
Therefore, while determining the early mortgage renewal, assessing what can save the most money and possess the least degree of financial risk for a secure future becomes pertinent. Talk to an expert who can help you decide the best course of action.