Very often in casual conversation about mortgages, I have people ask me what they should do when their mortgage is up for renewal. The answer is simple.
What can you do at Renewal?
On renewal, don’t sign blindly.
A few months before your mortgage is up for renewal, most people will receive a renewal notice in the mail from their current bank or lender. Generally speaking, this will remind the recipient how good their bank is to them to give such options, and proceed to list the terms and rates which they’ll current offer. These rates, however, are almost always not competitive with the market — but, of course, they won’t tell you that.
The bank is hoping that you’ll simply check the box for one of the terms listed, sign the bottom, and mail the form back. With that, they offer a no-fuss, no-muss solution — simply overpay, and you won’t have to do any legwork.
What, then, are your options? What can you do when it’s time to renew?
a) Transfer Your Mortgage
By using what’s called a “switch/transfer” program, you have the ability to move your renewing mortgage, more or less intact, to a new lender to take advantage of better rates or terms. In this instance, you can compete for a better rate, shorten your mortgage, or go to a lender who has better pre-payment privileges or different calculations if you want to break your mortgage in the future.
What you cannot change is the amount of the mortgage (you can usually add in a discharge fee from the current one, but little or no more than that), the ownership of the property (i.e., you can’t add or remove anyone from title), or lengthen the amortization of the mortgage.
Under this program, many lenders will bear the cost of any legals which need to be done to move the mortgage from another bank or lender to themselves, and if necessary, they’ll pick up the cost of an appraisal. So essentially, you get to have your cake and eat it to. By doing this, you’ll get the best available rate, and it’ll cost you.. nothing.
Transfer-Switch to Get the Best Rates
b) Refinance Your Mortgage
If you need to lengthen the amortization of your mortgage, or add money for renovations, other investment, debt consolidation, educational costs, or any other personal reason, you’ll be looking at a refinance. The downside to this is that you’ll be on the hook for appraisal costs, if necessary, and legal fees — but these can be built into the mortgage as well so that while you’ll bear the cost, it won’t be directly out of pocket — making it much more palatable for many homeowners.
Any of these reasons can make a great deal of sense, depending on the equity which exists in your property and what the needs of you and your family are.
Generally speaking, borrowing against your home is by far the cheapest access to money that most people have — meaning that if you can leverage that to reduce your overall cost of borrowing, or achieve cashflow relief if it’s necessary, it can make a great deal of sense.
Debt Consolidation Can Save Thousands
The chart to the left gives a realistic illustration of what can be achieved. In this instance, it can reduce the overall monthly output to maintain bills by nearly half, based on a common interest rate vehicle loan from a bank, and line of credit and credit card balances which are common for many Canadians. Because the interest rates on such debts are generally much higher — in the case of credit cards, often more than six times higher than the best mortgage rates available — it can be a huge financial relief to be able to make such a shift.
In this kind of an instance, one great option is to be more aggressive in terms of the mortgage payment that’s made on the new consolidated mortgage. By keeping your payments as high as can reasonably be managed, while simultaneously limiting the interest that you’re paying on your debts, you can give yourself the opportunity to move forward and closer to financial freedom much faster — rather than spinning your tires paying interest to creditors.
Whatever your particular situation or ambitions in terms of managing your debt, consulting a quality mortgage broker and having an informed discussion can allow to to explore your options.
Whatever you do, don’t sign that renewal offer without knowing what you’re missing out on.
Marc Mahoney — firstname.lastname@example.org