Renewing a mortgage this year might be a little scarier than in years past, due to recent mortgage rule changes, but don’t sweat it. Despite what your current lender may tell you, you are still able to shop around for the best rate. You’ve got this and we’re here to help.
How has qualifying for a renewal changed?
The Canadian Government announced a new mortgage stress test in Oct. 2017 that went into effect Jan. 1 of this year. It requires all homebuyers to qualify at the greater of either the Bank of Canada’s posted five-year mortgage rate (currently 5.14%) or two percentage points more than the contracted rate (the mortgage rate a buyer pays).
Well, that stress test doesn’t only impact purchases; it must also be passed for mortgage renewals.
That is, unless you renew with your existing lender.
So many current homeowners may fret about having to pass the test and, as a result, choose to stay with their current lender instead of shopping around for a better mortgage rate at renewal.
That would be a mistake, according to James Laird, president of CanWise Financial.
“The truth is that it’s very rare, even with the new stress test, that you would have qualified five years ago and not today,” Laird says. “97% of people with a mortgage up for renewal would be able to pass a stress test and move to another lender. But it’s going to be perceived as more daunting.”
Despite this, Laird suspects some lenders will mention the stress test – and lack thereof if the client renews with them – when sending out renewal letters this year.
“From a marketing perspective, the existing lender can talk about you not having to pass a stress test to stay with them,” he says.
He estimates that 85-95% of people renew with their existing lenders and this messaging will encourage many to simply sign on the dotted line with their current lender once again. The problem, though, is that these people could be willingly signing on to pay more than they need to.
With that said, here are some things to think about when preparing to renew your mortgage.
The key is to shop around — just like you (hopefully) did when first purchasing your home. And start early to ensure you qualify.
Don’t wait for the renewal slip from your current lender; by then it will seem like time is running out and you’ll be more likely to just accept the renewal rate they offer (which will likely be much more than you should be paying).
Start searching four months before your term is up. Why four months? Because 120 days is the window lenders typical allow you to renew your existing mortgage without incurring a prepayment penalty.
This will also give you plenty of time to search around for better offers from other lenders to make sure you have all the power when renegotiating with your current lender if that’s what you decide to do in the days prior to your renewal deadline.
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Take financial stock
It’s likely that five years have passed since you last signed a mortgage contract (the majority of mortgages in Canada are for five-year fixed rate terms) and your life may have changed drastically over those years.
How have your financial goals changed? Are you planning on staying in your home long-term? Are you hoping to take some equity out of your home in the near future? These are things you should consider before choosing your next mortgage term and rate.
Speaking with a mortgage broker can help you figure out the best mortgage for your individual situation.
If your mortgage is up for renewal, you likely started your last term in 2013. Depending on the month you originated your mortgage (or previously renewed your mortgage), you may have been locked in at a rate of 2.64% for a five-year fixed rate (that was the lowest rate available in April and May of 2013).
That historically low rate is no longer available. Today’s best rate offered in Toronto on a five-year fixed rate is 2.99%. So, if you qualified at the lowest rate available five years ago, you are going to pay higher interest on your mortgage this year.
Use what you’ve learned
Over the past few years, you’ve learned a lot. You now have a better idea of what you want in a mortgage; would you prefer an open mortgage that allows you to make larger lump-sum payments without incurring penalties? If so, make sure you look for a mortgage that allows for those sorts of lump payments.
If you plan on moving in the next five years, you will want a portable mortgage.
With all that said, remember you aren’t locked in with your current lender. While they may try to keep your business by inciting fear of the stress test, remember there is a very real possibility you will not only pass that test if you choose to switch lenders but that you might save some money as well.
- 3 Tips for Mortgage Renewal Time
- What is the Qualifying Rate and How do I Use it?
- What Happens if Your Mortgage Renewal is Denied?