A mortgage is essentially a loan that is secured by your home.
When your mortgage term comes to an end, the next step is to renew it. That typically means a new interest rate, new terms and potentially a new lender to continue paying the remaining balance.
Mortgage renewals can be a little bit of work but they are great opportunities to reassess your
financial situation. It’s easy to renew right away with your current lender, but it’s critical to shop
around if you want to get the best mortgage.
In our experience, people normally spend a few hours renewing their mortgage which can lead to thousands in savings and peace of mind.
Signing renewal papers with your current lender is the easy way about it, but the easiest route is not always the best.
Of course, the banks want you to sign without thinking about it. Sometimes they’ll even show you a list of available interest rates with some that are artificially inflated so they can point to the cheapest one and make you feel like you’re receiving a good deal.
Don’t fall for it. Choosing the wrong rate can cost you a lot of money.
For example, if you need a $400,000 mortgage and settle for a rate just 0.25% higher than necessary, you might pay $5,359 more than you need to over the next five years.
So would you spend a few hours of shopping around for a better rate in order to save $5,359? Of course you would.
This one’s a biggie. In addition to shopping for the best rate, you’ll need to decide whether the
rate will be allowed to fluctuate along with the bank’s prime lending rate (variable rate) or whether it will be locked-in for the whole term (fixed rate).
From a purely mathematical point of view, a variable rate mortgage has almost always been
cheaper than a fixed rate. On average, people who choose variable rate mortgages have lower
monthly payments, pay less interest, and pay smaller breakage fees if they end their mortgage
However, from a psychological point of view, people with variable rate mortgages never know
for sure if or when their monthly mortgage payment might increase or decrease, and that can
Is it worth likely paying more for a fixed rate mortgage in order to have a more predictable
payment? That’s a very personal decision that only you can decide.
Canadian mortgage terms can be 6 months (shortest) to 10 years (longest), however most people end up going with a 5-year term.
There’s nothing wrong with a 5-year term if you have a good sense of how your life will play out over the next five years. However, if you move and break your mortgage before the term is over, you could end up paying hefty penalties. The banks know this, and it may be one of the reasons they promote 5-year terms by default.
If you have a variable rate mortgage, the breakage penalty is generally equivalent to three
months’ interest. If you have a fixed rate mortgage, the penalty calculation can be quite complex
and generally a lot more expensive.
When selecting your mortgage term, it’s important to consider if you’ll be moving in the near future, as well as things like that status of your employment and family life. Even those these can be hard to predict, you’ll want to keep them in mind.
Renewing your mortgage is the perfect time to think about consolidating your other debts.
For example, if you have a credit card, car loan or other debt with a higher rate of interest,
it’s a no-brainer to pay them off using a mortgage with a lower rate. The banks will not help you with this, because they would obviously prefer to charge you the highest possible interest rates.
We recommend using your mortgage renewal time to build or review your personal financial plan and look for opportunities to consolidate any consumer debts you’re carrying.
Moving forward with the mortgage renewal process, here’s what we recommend:
Do not accept the first renewal offer you get from your bank or lender, there will be better deals available to you if you take the time.
Do speak to a mortgage broker who can shop the market and find you the best deal for your situation.
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