Clay Jarvis
Assuming you still owe money on your mortgage, you’ll be facing a mortgage renewal when your current term expires.
Renewing a mortgage is an opportunity to make some important decisions about the next phase of your home loan, including payment frequency, which lender you want to borrow from and whether to go with a fixed or variable rate of interest for the duration of your new term.
Preparing for a mortgage renewal ahead of time can help you secure a more affordable mortgage for the next several years.
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What is a mortgage renewal?
A mortgage renewal is when you work with a lender to structure a new mortgage contract.
In Canada, a mortgage’s amortization period, or the time required to repay a home loan completely, is typically made up of multiple terms. Those terms dictate how long a mortgage contract stays in place. A mortgage with a 25-year amortization, for example, might be made up of five five-year terms. You need to sign a new mortgage contract at the end of each term until your mortgage is fully paid off.
If you took out a five-year fixed-rate mortgage in November 2019, for example, your term will expire in November 2024. Unless you’re able to pay off your remaining mortgage balance at that point, you’ll need to renew.
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Is renewing a mortgage the same as refinancing?
The two processes are similar in that they both result in a new mortgage contract, but renewing a mortgage is not the same as refinancing.
A renewal is an extension of a mortgage contract that might involve changes to the interest rate, amortization period or term. Refinancing a mortgage requires breaking your mortgage contract and signing a new one.
| What happens? | When does it happen? | What are the risks? | |
|---|---|---|---|
| Mortgage renewal | Homeowners and lenders work together to craft an updated mortgage contract. | At the end of each mortgage term. | Being offered a higher interest rate. Not being offered a renewal. If you renew with a different lender, you may incur fees and face tighter qualification guidelines than if you renewed with your current lender. |
| Mortgage refinance | If a homeowner decides they would be happier with a different mortgage, and their current contract won’t allow for the desired changes, they break their current mortgage and negotiate a new one. Refinancing is up to the borrower. | There’s no schedule or timeline. | Prepayment penalties, which can be especially high if you have a fixed-rate mortgage. Requalifying and facing a new mortgage stress test. Administrative, legal and home appraisal fees. |
How does the mortgage renewal process work?
The mortgage renewal process isn’t overly complicated. Your current mortgage lender presents you with a new mortgage offer. You either sign it, try to negotiate a more suitable arrangement or choose to renew your mortgage with a different lender.
You’ll still have to make some important decisions regarding your mortgage, though. That’s where things can become a little stressful. Preparing for these decisions ahead of time can make the renewal process easier — and hopefully more financially rewarding.
When should you start the mortgage renewal process?
Generally speaking, you’ll want to start the mortgage renewal process sooner rather than later. This will give you more time to compare current mortgage rates among lenders, weigh the options against your financial needs and negotiate the best mortgage contract for your next term.
Some lenders suggest beginning the renewal process up to four months before your renewal date. Some may let you renew your mortgage up to six months early without charging you a prepayment penalty.
You can always wait for your lender to send you its renewal offer. Federally-regulated financial institutions — Canada’s largest banks — are required to send you a renewal statement at least 21 days before your renewal date.
What is a mortgage renewal statement?
A renewal statement outlines the following:
- The remaining balance of your mortgage.
- The interest rate (with specifications that this rate won’t increase until your renewal date).
- The payment frequency.
- The term.
- Charges and fees that apply.
If you’re satisfied with the renewal offer, you can sign it and be done with the renewal process until your next term expires.
Do mortgages automatically renew?
Some lenders will automatically renew your mortgage if you don’t respond to a renewal offer before the renewal date. The renewal statement you receive will explain this.
Automatic renewal, though effortless, could come back to haunt you. A lender’s automatic renewal process might involve signing you up for a shorter mortgage term that carries a higher interest rate. Even if it doesn’t, opting for an automatic renewal means giving up all of your negotiating power.
Where can you renew a mortgage?
Option 1: Renew with your current lender
Renewing your mortgage with your current lender is generally the path of least resistance. Whether you accept the first renewal offer you receive or negotiate a more acceptable one, you won’t be required to do much else besides sign your new contract and keep making your payments.
You won’t need to requalify, and if you’re borrowing from an A lender, there shouldn’t be any renewal fees involved. Renewing a mortgage from a private lender, however, might cost you.
Some lenders allow you to renegotiate your interest rate before the end of your mortgage term through a blend-and-extend option. This allows you to extend your existing term at a lower rate by blending a new, current interest rate with the old one.
You may also be able to get a better interest rate or more favourable conditions in your mortgage contract if your lender is prepared to match other offers. Provide evidence of these offers to your current lender to use this tactic more effectively.
Nerdy Tip: Always make sure you understand your lender’s renewal process before signing a mortgage contract.
Option 2: Renew with a new lender
If your current lender isn’t able (or willing) to offer you a more beneficial rate than other lenders, you’re free to renew your mortgage elsewhere.
Renewing with a new lender, however, can be a much more involved and expensive process that includes:
- Requalifying. Your new lender will have to assess your finances to ensure you can handle the costs of your new mortgage. Your credit score, income and debt service ratios will all have to be re-evaluated.
- Facing another stress test. If you have an uninsured mortgage, you may be subject to a mortgage stress test as part of the re-qualifying process. If mortgage rates are significantly higher than when you took out your initial mortgage, you may not qualify for the mortgage amount you need.
- Paying fees, fees and more fees. In addition to the cost of a home appraisal, you also might have to pay discharge, registration or other administrative fees. Lenders may be willing to take on some of these fees in order to get your business. Ask if that’s an option.
Nerdy Tip: On November 21, 2023, the federal government announced a new Canadian Mortgage Charter as part of its Fall Economic Statement[1]. The charter included a recommendation that homeowners with insured mortgages no longer be stress tested when they renew their mortgage with a different lender. Prior to the announcement, lenders had little reason to offer mortgage clients competitive rates upon renewal. But with the Canada Mortgage Charter now in effect, waiving the stress test on insured mortgage renewals should inject more competition to the market and theoretically lead to lower renewal rates across the board — if lenders comply.
Mortgage renewal interest rates
The interest rate you’re offered at renewal is based on your lender’s current mortgage interest rates. If rates have risen or fallen since the beginning of your previous term, it will be reflected in their mortgage renewal rates.
Receiving a renewal offer from your current lender means you won’t have to requalify, so any improvements you’ve made to your finances during the past few years won’t benefit you during the underwriting process. But they might make for a more convincing argument during negotiations with your lender.
Renewing at a different lender and your rate will be determined through a combination of that lender’s current rates and an assessment of your finances. In this scenario, income, debt and credit score could all play a role in getting you a better rate, but if fixed or variable mortgage rates have spiked since your last mortgage term started, plan for your next term to be more expensive.
What happens if your lender won’t renew your mortgage?
If your finances remain solid and you’ve been a diligent mortgagor, your lender will typically choose to renew your mortgage. If your income’s been disrupted or you’ve missed payments over the course of the last term, however, your lender may not want to assume the increased risk and refuse to renew your mortgage.
When this happens, it’s not necessarily a reason to panic — especially if you started the renewal process early. B lenders offer mortgages to borrowers with lower credit scores who can’t get approved at the big banks.
Because they take on more risk, B lenders tend to charge higher interest rates than chartered banks. But B lender mortgages also are meant to be short-term solutions that last three years or less. During that time, you’re expected to get your finances in shape so that you’ll be able to renew at an A lender at a lower rate once the next term expires.
If a B lender won’t renew your mortgage, you may have to apply for financing at a private mortgage lender. The qualification criteria may be even looser than with B lenders, but the rates and fees are likely to be much higher.
Renewal time, especially if you have concerns about what you can afford, can be an ideal opportunity to speak to a mortgage broker. An experienced broker may be able to introduce you to lenders — and rate offers — you don’t have access to.
Mortgage renewal tips
Here are four things you can do to gain a little more control over the mortgage renewal process:
1. Assess your finances
Before you can know what you want from your next mortgage term, you need to have a clear idea of how your finances are holding up overall.
If your household income has increased, for example, you may be able to afford higher payments during the next term, which can help pay off your mortgage faster. If cash flow has become tight, you may have to consider extending your amortization period as a means of securing smaller monthly payments.
You don’t have to do this assessment yourself. Turn to your bank’s mortgage advisor or your mortgage broker for assistance. You also can do some general estimating of future mortgage costs by using a mortgage affordability calculator.
2. Assess your mortgage’s features
Renewal can be an opportunity to make other adjustments to your mortgage to make it more manageable. You might, for example, decide to increase or decrease the frequency of your payments, or switch from a variable interest rate to a fixed interest rate.
3. Use prepayments to reduce the principal before you renew
It’s always a good idea to try to reduce your principal as much as you can before renewing. It won’t necessarily affect the rate you’re offered, but there’ll be a smaller mortgage amount for the bank to charge interest on — and you’ll pay off your mortgage faster.
Most mortgages from A lenders allow you to make prepayments toward the principal each year. You are generally allowed to either increase your monthly payment or make lump-sum payments up to a certain limit. Just be sure to adhere to the prepayment limits outlined in your mortgage contract, or you could be charged prepayment penalties on the excess amount.
4. Negotiate
It’s crucial that you try to negotiate with your lender upon renewal.
Lenders know that renewing, particularly if rates have risen over the past few years, can be an uncomfortable situation for borrowers. The combination of high mortgage rates and the mortgage stress test can make qualifying for a suitable mortgage at a different lender difficult, so your current lender may not feel much pressure to offer you an attractive rate.
Even if you’re unlikely to make a switch, talk to a few of your lender’s competitors and see what their offers look like. At the very least, you can show one to your current lender and hopefully convince them to offer you a better deal.
If you’re not comfortable negotiating, consider tagging in a mortgage broker.
Frequently asked questions about mortgage renewal
There are many reasons why your mortgage payment might change at renewal. If mortgage rates have shifted since the beginning of your last mortgage term, your mortgage payment is likely to change based on the new rate your lender offers you. Your payment also might change if you adjust your amortization period, payment amount or payment frequency.
Certain lenders will automatically renew your mortgage, possibly for a short term at a higher interest rate. If your mortgage doesn’t automatically renew, and you take no steps to renew it before the renewal date, the remainder of your mortgage will be due in full.
Article Sources
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Department of Finance Canada, “2023 Fall Economic Statement,” accessed January 30, 2024.
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