When your mortgage term comes up for renewal, you have several decisions to make – one of the most important being whether you want to stay with your current lender, or switch providers and take your mortgage to a new lender. We know that switching providers is often the best option, but there are a number of things to consider before you can do so. Let’s look at how to make the decision, and what you’ll need to do in order to switch providers.
Why You Would Switch Providers
There are two scenarios when it makes sense to switch providers:
1. To obtain a lower mortgage rate
If another lender can offer you a lower mortgage rate than what your current mortgage provider has, switching would save you from having to pay potentially thousands of dollars in interest charges.
For example, let’s say you have a home worth $400,000 and a $315,000 mortgage amortized over 25 years. Your current lender offers to renew you for a 5-year term at a fixed rate of 2.59%. With that, you’ll have a monthly mortgage payment of $1,425, and at the end of this 5-year term you will have paid $37,606 in interest.
However, you decide to shop around and find another lender who offers you a 5-year term at a fixed rate of 2.39%. If you make the switch, your new monthly mortgage payment will be $1,394, and by the end of this 5-year term you will pay only $34,650 in interest.
By switching providers, you could avoid having to pay $2,956 in interest over 5 years:
2. To get better terms and conditions
If another lender can offer you better terms and conditions, it may be worth switching your mortgage over to them. One of the most important terms and conditions to consider is your prepayment options. If a new lender can offer you better prepayment options than your current mortgage provider, switching could help you pay down your mortgage sooner and save you from having to pay additional interest costs.
For example, most lenders let you increase your monthly mortgage payment amount once each year, but the amount you can increase it by often varies from lender-to-lender.
Let’s say you still have that home worth $300,000 and the $215,000 mortgage amortized over 25 years. Your current lender has offered to renew your mortgage at today’s best rate of 3.79%, which results in a monthly mortgage payment of $1,107. By making your regular payments each month for 5 years, you will pay $37,880 in interest.
Increasing Your Monthly Payments by 10%
You current lender’s prepayment privileges allow you to increase your monthly mortgage payment amount by 10% once per year. If you decide to take advantage of this only once at the beginning of your new 5-year term, your new monthly mortgage payment will go up to:
If you make payments of $1,217.70/month for the entire 5-year term, you will pay $37,229.22 in interest. By increasing your monthly mortgage payment amount by 10% at the beginning of your new term, and you could avoid having to pay $650.78 in interest over 5 years:
Increasing Your Monthly Payments by 20%
Let’s say, instead, that you switched to a lender who offered you the same fixed rate (3.79%) but prepayment privileges that allowed you to increase your monthly mortgage payment amount by 20% instead of 10%. If you decided to take advantage of this only once at the beginning of your new 5-year term, your new monthly mortgage payment would go up to:
And if you made payments of $1,328.40/month for the entire 5-year term, you would pay just $36,576.01 in interest. By increasing your monthly mortgage payment amount by 20% at the beginning of your new term, you would save $1,303.99 in interest over 5 years:
The table below outlines the difference between the two monthly prepayment options:
|Term Details||Monthly Prepayment Option||Monthly Prepayment + Prepayment Option||Interest Paid Over 5-Year Term||Interest Saved|
|Current Lender||5-Year Fixed at 3.79%||Mortgage Payment + 10%||$1,217.70||$37,229.22||$650.78|
|New Lender||5-Year Fixed at 3.79%||Mortgage Payment + 20%||$1,328.40||$36,576.01||$1,303.99|
|Difference of Prepayment Options||+10%||+$110.70||$653.21||$653.21|
It’s important to note that the prepayment options offered by every lender are slightly different. Some lenders allow you to increase your monthly mortgage payment amount by 10-25% once per year, and some allow you to put lump sum payments towards your principal every year or on your mortgage term maturity date; there are also many lenders that offer both options.
How to Switch Providers
The first step to switching providers is to find a lender who can offer you a better mortgage rate and/or terms and conditions. To do this, you can either conduct your own independent research, or contact a mortgage broker who will guide you through the entire process.
Once you’ve found a new lender with an offer you want to accept, you’ll need to submit a formal mortgage application. Because your new lender may use different qualifying criteria than your current lender did, you’ll need to provide the following documents with your application:
- a copy of your mortgage renewal letter from your current lender
- proof you own your home, through something like a property tax bill
- confirmation of income, through a pay stub or letter from your employer, and
- proof of property insurance.
Once your mortgage application has been approved, your new lender will request a Payout Statement from your old lender. The Payout Statement will include the details of your current mortgage, including your outstanding mortgage amount as of your renewal date. Your new lender will use the mortgage amount stated on the Payout Statement as your new mortgage amount with them.
The last step in switching providers is to meet with your new lender to pay any outstanding fees that may be due (outlined below). Then your new lender will pay out your mortgage with your old lender, and issue you a new mortgage with them.
Switching Provider Fees
The fees you’ll have to pay when switching providers may include:
- an appraisal fee to verify your property’s value ($150-$500)
- an assignment fee to transfer the mortgage from the old lender to the new lender ($25-$330)
- a discharge fee to discharge the old mortgage and register the new mortgage, and ($5-$395), and
- legal fees for your lawyer to sign the new mortgage agreement ($1,500).
When Switching Providers Becomes More Complicated
There are a few situations where you can’t simply switch providers using the methods described above. These situations include:
- If you want to switch providers partway through your mortgage term, you’ll have to break your mortgage term and pay a prepayment penalty to your current lender.
- If you have a collateral mortgage, you can’t simply switch providers using the method outlined above. You have to hire a real estate lawyer (and, therefore, pay legal fees) to help you get out of your mortgage with your current lender.
- If you want to change your mortgage amount or amortization period at renewal time, you must refinance with your current lender instead.