Renewal / RefinanceQuestions and Answers to consider before your mortgage reaches maturity
Frequently Asked Questions
Renewal Time...What you need to know!
The Q + A below was established directly based upon common questions from clients relating to renewal time and what options should be considered.
Some clients are concerned they won't be able to qualify at renewal based on the new stress test guidelines.
Here's what you need to know:
- when stress testing applies; and
- what to do when you're within 90 to 120 days of your renewal date; and
- a whole bunch more stuff...
What is the difference between "renewing" and "refinancing?
- Renewing – is simply choosing to accept a different rate and term at maturity (renewal). This new rate is then applied to the balance and amortization remaining to determine your new payment.
- Refinancing – is where there is a change in the amount and/or amortization together with any product offered by the existing or a new lender. If refinancing is done at maturity, a penalty for early payout can be avoided. If the mortgage is refinanced during the term, a penalty can be blended into the interest rate, referred to as “increase and blend”, or the penalty can be added to the mortgage principal instead of blending into or increasing the rate. Where you increase the amortization (mortgage life) as well as the mortgage amount and blend the penalty into the rate, this is referred to as “increase, blend and extend”.
- Needless to say, determining your cost benefit is a necessary step and that’s where I jump in to give you the math.
Do I need to requalify?
Most financial institutions don’t require you to re-qualify. There is only one bank to my knowledge that still not only does an annual credit review, but also a re-qualification at renewal. I won’t name that bank and will never recommend this financial institution to you either.
How will my lender notify me of renewal?
Anything goes here. They may contact you by email, snail mail, or by voice mail messages. Some lenders may contact you as far out as six months prior to your renewal date to get you to renew early. Caution: Don’t fall for this tactic especially if your current rate is lower than prevailing rates. Why?
- If you renew early, you lose your remaining term and your current rate;
- If rates were to drop again closer to renewal, you won’t get the lower rate;
- They generally communicate this to you with emphasis that you don’t need to qualify and can just sign and initial to renew. What they can’t tell you is if their rate is competitive…they just want you to renew to keep your business.
This is why the brokerage world exists…so we can recommend you keep the status quo or consider something more competitive as to rate and products.
Can I switch to another lender at or before renewal? What are the costs?
Switching at renewal is preferred to avoid penalties.
- If your current lender doesn’t have competitive rates within 4 months of your renewal, we can get an approval for a competitive mortgage 120 days or 4 months in advance of your renewal and switch your mortgage on your renewal date thus avoiding penalties, legal and appraisal costs.
- Additionally, if rates drop during this 120 day timeline, we can have your approved rate reduced respectively or seek any other lender option that may be available to you. This is a final check completed within 20 business days of your renewal.
Switching before renewal
- This is generally an option to consider only if rates may rise before your renewal date and again, if your current lender rates and product offerings aren’t competitive as determined by any early renewal offer they may present to you.
- Doing this will trigger a penalty and therefore, a cost benefit to switch needs to be compared against any early renewal rate offered.
- A new lender will still cover certain legal and appraisal costs to switch. Most will generally capitalize (add to your current balance) any penalty cost you may be incurring up to a maximum of $3,000 (this will vary from lender to lender.)
If my new rate is higher at renewal, is there any way I can lower the payment?
Yes and No,
Yes, if you have been paying your mortgage with a frequency other than monthly like accelerated weekly or bi-weekly, your mortgage amortization (or effective amortization or mortgage life) is less than your actual time elapsed. Time elapsed simply means if you started with a 25-year amortization and you just completed a 5-year term, you have a 20-year actual remaining amortization. If you have paid more frequently as mentioned above, your effective amortization could be 16.3 years (depending on your rate and mortgage amount). The lender can then reset your renewal to calculate payments on your actual “time elapsed”, remaining amortization, and potentially reduce your current payment depending on how different your new interest rate is compared to you existing rate.
The answer is NO, if you have only been paying with a monthly frequency. There is no effective amortization in this case and only actual time remaining is your benchmark.
NOTE: If you can afford to keep your accelerated payment frequency AND can afford a higher payment, DO SO, and this will continue to have you burn away your mortgage commencing from your current effective amortization. To do otherwise will cost you a great deal more interest and take you longer to pay off your mortgage.