5.3.5 Renewing and renegotiating your mortgage

From: Financial Consumer Agency of Canada

Your mortgage may end when the term is over, or by agreement between you and the lender. When the term ends, if you still owe money you may have to renew the mortgage. If you want to change the agreement or end the mortgage before the term is over, you will usually have to pay a fee and negotiate a new mortgage.

Renewal

When your mortgage agreement comes to the end of its term, you may still owe a large amount of money to the lender. If you have money available, you can pay any amount to reduce the principal. If you can't pay it off completely, you will have to renew the mortgage, either with the original lender or with a new one. This is a chance to review all the terms of your agreement and make sure they still meet your needs.

The lender must send you a renewal statement at least 21 days before the end of the term, summarizing the information about your mortgage. The lender has the option not to renew the mortgage if you have a poor payment record, but it must notify you if it decides not to renew.

Just as with a new mortgage, you should find out what terms your lender is offering, and compare them with terms you can get from other lenders. To find out your options, you should start researching several months before the term expires. You may be able to get better terms if market conditions have changed, or if your own situation has changed.

Don't hesitate to take your mortgage to a new lender if you can get better terms than your original lender is willing to offer. However, there may be additional costs and legal fees to change your mortgage from one lender to another. See if a new lender would be willing to cover these costs to get your business. You should get legal advice if you make a new mortgage agreement.

Tip

Check that the benefits of transferring a mortgage outweigh the costs. The new lender may be willing to absorb some costs of transferring the mortgage.

A mortgage broker can help you look for a new mortgage with better terms. However, the broker may not check if your current lender can offer you a better deal. Contact your lender directly to see if it will match any offer you receive.

Renegotiation

Some mortgages allow you to renegotiate some items before the term is over. For example, if interest rates available in the market have fallen significantly, you may want to renegotiate your interest rate or even terminate the agreement early.

Normally, you can renegotiate only if you pay a significant charge that provides the lender with the profit it would have made had you continued the agreement. Before you decide to renegotiate, ask your lender what the total cost of all charges and fees will be. The lender must explain to you how it calculates the charges. The costs are likely to be more than any savings you might get.

Some lenders offer a "blend and extend" option—they will allow you to extend the mortgage for a longer term at a lower interest rate by blending your current rate with a new lower rate.

Tip

Carefully weigh the benefits and risks of renegotiating. You might get a lower interest rate or extend it over a longer term. But the costs might be more than the savings. And rates might continue to go down to an even lower level when your normal renewal date arrives.

Example

Jim has a mortgage of $100,000 with a fixed interest rate of 7.5 percent. He has three years left on his five-year term. The current market mortgage rate for a three-year term is 5.5 percent. Jim is thinking about renegotiating, but his mortgage agreement says that to renegotiate he must pay a prepayment charge based on the difference between his existing interest rate and the new one.

  • The lender calculates his prepayment charge to be $5,820.
  • Jim calculates that at 7.5 percent, he'll pay $25,545.89 for the remaining three years of his mortgage.
  • At 5.5 percent, his payments for three years will total $21,314.87.
  • His interest saving would amount to $4,231.02. But he'd pay about $1,600 more in charges than he'd save in interest. In the end, renegotiating is not worthwhile.
Jim compares the benefits of lower interest against the cost of prepayment.

To calculate the savings from changing to a lower interest rate, you can use the Financial Consumer Agency of Canada's Mortgage Calculator to compare costs with different interest rates.

Use the Financial Consumer Agency of Canada's Mortgage Calculator to compare the costs of renegotiating a loan. If you have a mortgage, use the information from your own mortgage. If you do not, use the sample information on the website to view the results.

Mortgage prepayment charges

Financial institutions have a variety of ways to calculate the cost to break or change your mortgage. The most common methods are three months' interest, or the difference between the interest rate on your mortgage agreement and the rate the institution can get when it re-lends the money, multiplied by the number of months remaining. Check your agreement or contact an agent to see how the prepayment charge is calculated.

Charges and fees may change when you renew your mortgage.

Charges may also apply if you:

  • are late in making a regular payment or don't pay the full amount
  • pay more than the allowable prepayment in your agreement.
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