Unless you come up with the cash to pay off the entire balance of your mortgage in your first mortgage term, you’ll likely face a few renewals in your lifetime. A mortgage renewal is simply the process of taking the outstanding balance of your mortgage and renewing it for another term at a new (and hopefully lower) mortgage rate.
However, with rates currently on the rise, it’s now more important than ever to ensure you get the best possible deal at renewal time. We’ll show you how.
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If you don’t already have the maturity date (the date your mortgage term ends) penciled into a calendar, you’ll know it’s time to renew when your current mortgage provider sends you a renewal slip in the mail. The slip includes a new mortgage rate and term offer, which you can simply sign and send back. However, it’s in your best interest to take a more proactive approach. Here are our top three tips for mortgage renewal time:
1. Consider your current financial goals
Before you sign your mortgage renewal slip and send it back, you should first review your financial goals to determine if your current provider can offer a mortgage product that suits your needs. For example, if your current mortgage term is a five-year fixed rate, the renewal slip will likely be for another five-year fixed. If you think you’ll stay in your home for that amount of time, great. But if you know there’s a chance you’ll downsize, or potentially move to a new city in the next few years, you may want to look for a three-year product instead.
Other financial goals to consider may be how extra money (like an inheritance) could affect the prepayment options you want as well as whether it makes sense to refinance your mortgage or get a HELOC to access equity.
Knowing what you need in a mortgage should help you form the decision around which lender and product to choose.
2. Start to negotiate/shop around early
Sure, you may be a few months away from mortgage maturity but, as you know, the early bird gets the worm; and this phrase rings especially true with the mortgage renewal process. While your current lender will likely send you that renewal slip sometime in the last 30 days of your mortgage term, you can usually start negotiating as early as 120 days before your maturity date. To ensure you’re ready, find the maturity date on your mortgage contract (it may also be visible through online banking) and count 120 days back on a calendar.
If you can’t negotiate a better offer, this gives you time to start considering switching providers. You may not be able to switch your mortgage over until your actual renewal date arrives, but it’s best to give a mortgage broker time to find the best product and get all the paperwork ready, so you’re not left scrambling at the last minute.
Keep in mind that one week isn’t enough time to switch, so you need to start early.
3. Ask for a better mortgage rate
With those little mortgage renewal slips, lenders make it all too easy for you to renew with them—and we know you’re busy, but you’ll literally pay for this kind of convenience. On average, mortgage providers only offer their existing customers a discount of 0.25% off their posted rate on a renewal slip. How would you feel if you could have received a lower rate from your current lender or another provider?
Negotiating a better rate becomes even more important in a rising rate environment, like the one we’re currently in.
Let’s say your mortgage matures next month and that you had previously agreed to a five-year fixed rate at 2.74% (the best available rate on March 1, 2013). We’ll also assume you owe $300,000 on your mortgage and 20 years left to amortize.
Your current lender may offer you a discount of 0.25% off the posted rate (currently 5.14) for a new rate of 4.89%.
That would mean monthly payments of $1,953.60.
However, shopping around could mean securing a much better rate for the next five years. For example, the best possible rate in Ontario right now on a five-year fixed rate is 2.94%. If you were to qualify at that rate, your monthly payments would be a much more manageable $1,652.13.
Some people are too scared to try and negotiate with lenders; they think that what they see is what they get—but it’s not true. You can ask for a better mortgage rate and, if they want your business, they will offer you one. And if they can’t, go back to step #2 and shop around. Being able to access the best mortgage rate is one of the most popular reasons people switch providers at renewal time.
If you take the route of switching providers, a mortgage broker may become your best friend. Rather than having to go from lender to lender, a mortgage broker can pull your credit report once, and find a list of lenders who will work with you and the best rates/products they can offer.
If you’re not quite ready to make a decision at that first appointment with a broker, ask them for a rate hold on the best product. Rate holds protect you from interest rate increases for up to 90 to 120 days. And don’t worry: If interest rates go down during that time, you can negotiate down to that new lower rate, too.
The bottom line
Renewing your mortgage can be quick and easy—but signing that renewal slip and sending it back won’t get you the best mortgage rate or product. By following these tips, doing your own research, and working with a mortgage broker, you’ll get the best lender, terms, and rate for your current financial situation.
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