Mortgage Renewals

Mortgage Renewals

Avoid higher rates — avoid unsuitable products and terms — don’t be part of the masses!

Mortgage coming up for renewal… Don’t be too hasty in just signing the form and sending it back to the lender. Over 70% of mortgage holders do just that, and what is the usual result — a higher rate and a mortgage product that might not be best suited to their interests.

You want to renew/switch your mortgage to another lender who will most often give you a better rate. Most lenders now offer “no cost or low cost switches” and it’s a smart way to reduce your interest costs.

What happens legally when you switch?

Most people are unaware of the legal effect of switching lenders. When you renew you are essentially starting the process again — discharging the existing mortgage, taking out a new one, and beginning the whole payment process, albeit at a lower principal amount. As such, you should treat this as just as important a process as the first time you arranged the mortgage. Remember your situation will most likely have changed since then, and you require a different product with different terms attached to suit your situation.

In most Provinces a switch of the current or lower balance requires only a simple assignment of interest in the mortgage to be executed by all parties and registered on title. This assignment also attaches the specific terms that will have legal effect, and replaces those of the transferring institution. So even though the old mortgage is still registered on title, all those old terms and conditions registered by your previous lender will be completely replaced by those of your new lender under the assignment of interest.

Moreover, the form that you are holding in your hand from the lender who did your previous mortgage financing, has a rate that probably is not as competitive as it could be. Don’t let the hassle from the first time you negotiated dictate you just signing the form and sending it back to the lender — it will most probably cost you in the form of higher rates.

The lenders count on 70% of renewers just signing the form and mailing it in — they are not forcing you — but they are preying on human nature to embrace convenience. The fact is that it is likely another lender will give you what you want at a rate you want — there are no legal implications to you switching.   

What type of mortgage should you choose?

Today, more than ever, there are numerous mortgage options available.

Mortgage Categories 

Fixed-rate: 6 month, 1, 2 & 3 year (open, closed and closed-convertible) 4, 5, 7 & 10 year closed Variable-rate: 3, 4 and 5 year (open, closed, closed-convertible and capped) Split-term: Combination of all possible terms (6 month through 10 years) Self-directed RRSP: A specialty mortgage rate — term optional — within CMHC guidelines. Invest your own RRSP funds into all or part of your home mortgage.

Short-term risk and variable

If rates are low and stable, and/ or you are prepared to take a risk, you can generally pay a lower rate with a short-term mortgage. You simply roll over your term every 6 months, or float your rate against prime, with the option of locking in to a longer term at a later date. This is not for everyone, however, as sudden upward rate movements can have a significant impact on your payments. You may want to discuss this with your INVIS Mortgage Consultant.

Long-term

Any term 3 years or longer is considered “long term” in today’s economy. Because long-term rates are usually higher than short-term rates, you may not want to choose this option .On the other hand, by locking in you will avoid exposure to rate increases. You’ll have the comfort of knowing exactly what you payments will be and you’ll be able to manage your budget accordingly.

Split-term

A mortgage which allows you to minimize — or hedge — your interest rate risk by splitting your mortgage into 5 parts. For example: A $150,000 mortgage could be split into five $30,000 segments with terms of 6 months, 1, 2, 3 and 5 year terms negotiated at today’s best rates. The average rate would rise or fall much more slowly than changes in the market, however, as only the shorter terms are affected by even the most volatile rate movements over the first few years. Confused? Talk with your INVIS Mortgage Consultant.

Prepayment Options

Many lenders allow you to make a lump sum payment — usually 10% to 20% of the original principle balance. In addition, many mortgage products now include a “double up and skip-a-payment” feature. This lets you “bank” extra mortgage payments for a rainy day, at which time you can “skip” them if you need to.

Payment Changes

Most mortgages now allow the amortization to be adjusted by increasing the payment on closed terms by 10% — 20% per year, once annually.  

Payment Frequency

Most mortgages now come with the option to pay your mortgage at a frequency that matches your cash flow — weekly, bi-weekly or semi-monthly. The added benefit of the “accelerated” weekly and bi-weekly payments is that by dividing a regular monthly payment into two or four respectively, and deducting it at the new interval, an extra payment a year is made directly against principal. The surprising effect of this one extra payment a year is to reduce the amortization of the average mortgage by approximately 5 years, with cash savings at the end of the mortgage term.