12 May, 2021
calculating mortgage renewal rates

Despite the ongoing pandemic, the vaccination progress and overall stable medical statistics have created optimism regarding Canada’s economy. And the real estate market is not the exception! More so when talking about mortgage renewal rates. Even though unemployment levels are still higher than in 2019, shifting trends regarding work-from-home are expected to push the average residential prices by 4% to 6% in the second half of 2021. So, how does this affect Canadian homeowners about to renew their mortgage agreement with a federally regulated financial institution?   


How To Renew Your Mortgage In BC, Canada

Before the pandemic shook the real estate market, most homeowners gladly anticipated renewing their mortgages. As they were likely to benefit from a lower mortgage rate, they welcomed several creditors competing for their business. This isn’t the case anymore since all negotiating power seems to have shifted back toward financial institutions. One common mistake when proceeding to renew your mortgage is not doing the proper homework beforehand. The way things are right now, you can expect rates from as low as 1.49%, to up to 4.79%. If you’re one of the 36.3% Canadian homeowners looking to benefit from lower mortgage renewal rates, here are a few tips to look out for:  


1. Think Ahead 

Before going ahead with the mortgage renewal, research the most updated market rates. Compare some of the other lenders’ offers and decide if your current rates are aligned with the industry standard. This will allow you to be better equipped to negotiate the renewal terms with your current lender. If you feel you’ve somehow pulled the short end of the stick, find out if your lender is willing to “match and exceed” the quotes offered by the competition. Keep in mind that you can also change your current lender (a process called remortgaging). So more time will also give you more leverage into choosing a lender better suited for you. Let’s stay on topic…


2. Consider Remortgaging As An Option 

Switching lenders is not a complicated process, but it does require a little bit of planning. Some fees may apply when canceling your mortgage contract with your current lender. However, in the long run, you might end up saving over a thousand dollars. Weigh in your costs versus savings before making a decision.  


3. Do The Research

Before choosing a creditor, you should consider:

  • Their reputation on the market
  • Flexibility regarding pre-payments
  • Rates

The stress test somewhat hampers the mortgage renewal process, so the best-case scenario is finding the best lender sooner rather than later. And keeping them along for the ride!  


4. Don’t Forget About The Stress Test

In short, the stress test puts you, the borrower, face-to-face with a very high cost of being a homeowner. This is done so that all potential owners can prove they can afford a potential mortgage based on their lender’s minimum qualifying rate. That being said, the current stress test will possibly be subjected to some changes. Canada’s top banking regulator recently proposed to increase the stress test level to 5.25% or two percentage points above the market rate —depending on whichever is higher. As a result, this will make qualifying for a home loan tougher. In turn, this is bound to shrink the pool for qualified borrowers and ultimately reduce house prices.  


5. Read The Fine Print 

Before signing anything, make sure you fully understand the terms of your mortgage renewal contract.  Have clear evidence of how much you have left to play and how much of your payments will go towards the principal rather than the interest. Also, keep in mind that paying off your mortgage early can be bound to additional fees.  Another important aspect is whether you want to pay fixed or fluctuating rates on your mortgage (more on this below). talking to a mortgage broker

6. Hire a Professional 

A mortgage brokers’ main role is helping you navigate the bureaucratic red tape. A broker will truly show their worth when comparing your mortgage renewal rates to other offers on the market.  Rather than applying individually for separate lender quotes, mortgage brokers can pull your credit report and write down a list of available lenders, both traditional and alternative. Thus, you’ll have access to a curated list of eligible mortgage options, saving up time on the selection process.

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    7. Postpone Signing That New Loan 

    If you need a new loan, try delaying it until after your mortgage renewal is done and dusted. Remember, creditors can check your credit score at all times.  If you already have a loan and are planning to pay it off, try doing so before your renewal discussions start, ideally a couple of months before. The lack of debt will help you be perceived as less of a risk and might make negotiating a satisfactory rate much easier. Along with those tips, here are a few detailed answers to the most frequently asked questions:  


    Won’t My Mortgage Automatically Renew?

    Verify your contract. When it comes to renewal, most mortgage terms are automatically updated. However, chances are you won’t be getting the best interest rates and conditions.  A bank, of course, is first and foremost a business, and, just like any business, it’s looking to make a profit. This means that the posted rates banks are trying to sell you will never be the lowest available. The flipside is that these rates can be a starting point for negotiations.  This doesn’t mean cheaper is necessarily better. Lower rates have different penalties attached, so make yourself familiar with the fine print or address the issue directly with your lender. For example: are you automatically forfeiting the option to make extra payments by deciding on a lower rate? Or, will breaking your mortgage earlier generate more costly prepayment penalties So then, why go through so much trouble to negotiate a lower rate if the monthly mortgage payment amount remains the same? Well, there’s a good reason for that.  While lower monthly payments may increase your cash flow, the amount will most likely be negligible. However, keeping the same monthly payments at your renewed lower mortgage interest rate, will reduce the overall amortization. Hence, you’ll pay off your mortgage sooner. A contract renewal is the perfect opportunity to make a lump-sum payment on your mortgage because of the lack of pre-payment limits. This is a great time to make a dent in your amortization and save in total interest costs as every dime goes to paying down the principal.  So if you’re disposing of some extra cash flow, consider putting it aside and make a down payment when it’s time for your mortgage renewal.  


    What’s Better For The Borrower: Variable Or Fixed?

    Depending on how satisfied you are with the original mortgage loan restrictions, a mortgage renewal allows you to opt for either a fixed interest rate or a variable one. Research shows that over a longer period of time, the borrower is likely to pay less overall interest with a variable rate loan, as opposed to a fixed-rate loan.  A declining interest rate market offers an advantage to variable-rate borrowers because their loan payments will decrease as well. However, if interest rates start going up, so will the amount due on the loan bill.  If you lean (or are advised) towards a variable rate, keep in mind that a popular type is the 5/1 adjustable-rate mortgage, also known as ARM. This allows a fixed interest rate for the first five years, followed by an adjustable interest rate for the loan’s remaining period of time. Historical trends, while useful, aren’t automatically indicative of future performance. The borrower must also take into account the amortization period for a loan. The longer the amortization period, the bigger the risk taken by the borrower since a change in interest rates can generate a sizable impact.  


    What To Do If My Mortgage Renewal Is Denied?

    Both your current lender, as well as a new one, can deny your mortgage renewal request. There are several reasons for this. The most common one is falling behind on your current mortgage payment. And then, other debts, as well as a previous file for bankruptcy can downgrade your credit score. Always keep in mind to put yourself in a favorable position to pass the stress test, allowing more lenders to compete for your business. Renewing your mortgage can also prove difficult if you’ve recently been laid off, have no steady income, or are self-employed. In that case, you could refocus towards a B-Lender, or even a private one. If your credit score is too low, selling the house might be the only available solution. At the same time, if your credit and financial health are similar to when you first applied for a mortgage, you shouldn’t have any difficulty getting a new loan at a friendly rate.  


    Bottom Line

    Simply signing your mortgage renewal slip and sending it back might not be the best solution, especially in today’s economy.  When it comes to mortgage renewal rates, it’s essential to snoop around for the best offers on the market and fully understand the terms of your new loan before committing. We strongly advise doing the research and hiring a mortgage broker to get the best out of lenders, terms, and rates for your current financial situation. And if you need more advice and information regarding your best mortgage renewal option in BC, don’t hesitate to get in touch. We’ll be happy to help! In the meantime, you might also like:

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