Knowing how to renew a mortgage is essential as a homeowner since you’ll likely do it multiple times. Similar to your first mortgage, You’ll have different options available to help you save money when it comes to your renewal time.
Getting approved during your renewal period is pretty much automatic. That’s because your lender will not requalify you. However, accepting the terms of your new mortgage contract right away is not a good idea since you may have better options available.
Think of the mortgage renewal process period as a time to compare different types of mortgages, additional payments, and the best mortgage rates.
What does renewing your mortgage mean?
When you get a mortgage, your contract with the lender is for a certain period of time. This period is referred to as your mortgage term. The term can range in length from a few months to several years, but most people go with a 5-year term.
Since most people will have a mortgage amortization period of 25 years, they’ll get multiple mortgage terms to pay off the total balance. So, at the end of your current term, you will have to renew for a new term to continue to pay off your mortgage. Alternatively, you can pay off the balance with a lump sum payment to discharge your mortgage.
What some people don’t realize is that you can renew your mortgage with the same lender or switch lenders if you find a better option elsewhere.
What is a mortgage renewal statement?
A few weeks before the end of your term, you will receive what is called a mortgage renewal statement from your lender. This mortgage renewal statement will arrive by traditional mail (or electronically if you agree to receive statements this way) at least 21 days before the end of your existing mortgage term.
The renewal statement will include the following information:
- The balance or remaining principal at the date of the mortgage renewal
- The current interest rate offered
- The type of mortgage
- The payment frequency
- The term
- Any charges or fees that may apply
At this point, you can choose to accept the renewal terms, or you can negotiate or choose to look elsewhere. If you do accept the renewal terms in your mortgage statement, there are no renewal requirements. This can be advantageous to people who may have suffered a job loss or a decrease in annual income. You’d basically be offered a similar mortgage to what you already have, but with the current interest rates available.
This can benefit individuals who may have lost their job, recently started a brand new job, or have gone into freelance work. In these cases, you may not have the official required income to qualify for a new mortgage even if you have the savings in place to pay.
How to renew a mortgage
When your mortgage term has been completed, it’s good to reassess your needs before signing on for a new mortgage product. Some things you should consider before signing for your next term include:
- Your current budget – Can you afford to increase payments to pay off your mortgage faster (and therefore save on interest)
- Do you want to change the frequency of your payments?
- Do you want to consolidate any other debts with higher interest rates into your mortgage?
- Do you need to refinance or need a home equity line of credit (HELOC)?
- Do you need optional life/critical illness/disability/employment insurance?
- Are you happy with the services of your current lender?
If you want to accept the agreement for the new mortgage term with the same lender, then you can go ahead and do so. However, it makes more sense to shop around since you might be offered a lower rate from a different lender.
That said, if you’re going to shop around, keep in mind that the new lender will need to qualify you based on your current situation. They’ll check your employment status, debt ratios, and credit score. They’ll also need additional information, such as an appraisal of your home and more.
Again, if you are in a situation where reapplying for a new mortgage might be tricky given your current employment circumstances, then accepting the terms in the mortgage statement letter might be the best idea. However, if you are in a good financial position, then it’s worth your time to shop around.
Negotiate for a better interest rate
If you are happy with your current lender, then it’s worth your time to try to negotiate for a better interest rate. Many banks and other lenders do have some flexibility here, and it’s possible you can qualify for a discounted rate that is lower than what you have been quoted in your renewal letter. Speak to your lender about a better rate and bring in any other rates that you have been offered from other lenders or mortgage brokers as proof that there are better options available to you.
Note: Some renewals of mortgage terms might be automatic. So double-check the renewal statement, and if you don’t plan to renew based on the terms set out in the letter, get in touch with your current mortgage lender right away.
If your lender is unable to give you a better rate, or even if you are just unhappy with your current lender’s services, then consider switching to another lender. If you think you want to switch, start the research process a few months early to give you ample time to shop around for better rates and options, don’t wait until you receive your letter 21 days before the renewal date.
Finding the right mortgage can take weeks. Variable-rate mortgages also change frequently, so you’ll want to keep checking to see what’s the best offer available.
How to switch mortgage lenders
If you do want to shop around and switch lenders, then you might want to bring on a mortgage broker to do the work for you and help find you better rates and a product to suit your needs. Mortgage brokers can also answer any questions you have about how to renew a mortgage.
While switching mortgage lenders might be the best choice for you and result in a lower interest rate, you do need to be mindful of any additional costs, such as prepayment penalties and legal fees.
Switching lenders means you will need to submit a new mortgage application, the same way you did when you were first approved for a mortgage for your home. Keep in mind that different lenders have different approval criteria. Note that you will have to pass the mortgage stress test again.
Another factor to consider when switching mortgage lenders is the additional cost. These can include discharge fees, registration fees, transfer fees, assignment fees, notary/lawyer fees, and other administration fees on top of a home appraisal which will be required by a new lender. Your new lender may cover some of these fees to encourage you to switch, so be sure to ask.
Mortgage Loan Insurance Premiums
When switching mortgage lenders, another thing to be aware of is the possibility of mortgage loan insurance premiums. You may have to pay these if:
- Your loan amount increases
- You extend the amortization period
If you already have mortgage loan insurance, be sure to tell the new lender. They might be able to help you avoid paying these premiums twice.
Should you switch lenders when renewing your mortgage?
Generally speaking, you should never just accept the terms in the mortgage statement letter. Your lender definitely doesn’t expect you to. You should immediately shop around to see if there are better fixed or variable-rate mortgages available. If you find something better, you should probably switch.
At the end of your term, there are no prepayment penalties to be paid. If you go with a new lender, they’ll pay off the original owed to your old lender. Your mortgage will then be registered with your new lender. Moving forward, your payments will go to them. While it does require some work on your end, and some legal fees may be involved, the savings could be huge.
Searching for the lowest rates only takes a few minutes, so there’s no reason why you shouldn’t shop around and consider switching lenders.
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