Many Canadians who are keeping track of the rising interest rates may be worried about what it means for their mortgage and future renewals. The most recent Mortgage Consumer Survey from Canada Mortgage and Housing Corporation showed most mortgage renewers have a fixed-interest, five-year renewal term with an 11 to 20 year amortization period, leaving people with more than enough time to wonder, “Is it worth it to renew my term early?”
If rates continue to rise, and most forecasters believe they will, you may want to look into locking in at lower interest rate before it’s too late, but there are a number of factors to consider before re-signing on the dotted line.
Save money by renewing your mortgage early
Considering the current lending environment, the opportunity to renew early and tap into lower rates before they rise any further seems appealing. There were three interest rate hikes in 2018 and predictions are that there will be another two in 2019.
If you renew with the same financial institution, you may be able to break your old contract without penalty and start making payments at a new rate – predictably lower than what you would pay come your next renewal date. If that’s not possible, banks sometimes offer “blend and extend” programs where you can blend your current rate and the foreseeable rate you would have been offered at renewal. In these cases, renewing early could save you considerable money down the road, if rates do, in fact, increase.
However, if there are renewal penalties, or you decide to switch financial institutions, you need to look closely at whether making an early renewal is worth it or not. Lenders with a variable mortgage rate usually pay three-months-worth of interest payments as a penalty. For the majority of Canadians with a fixed mortgage rate, things get a bit more complicated. The penalty is determined by using the interest rate differential, which takes into account the current mortgage rate, the new mortgage rate, and the remaining months left in your current term.
So, to determine if the penalty is worth renewing your mortgage early, try out our Penalty Calculator and Mortgage Payment Calculator, and compare. This will help you estimate how much you can save (or not) if you move to a lower interest rate.
How the mortgage stress test may impact your decision
The mortgage stress test is as an added measure to ensure Canadians can afford their mortgages in the current market, and stricter qualification measurements were introduced early last year. It’s mandatory for all federally-regulated financial institutions to administer the stress test to those who are signing a new mortgage or renewing. Banks are required to use the minimum qualifying rate, which equals the greater of the Bank of Canada’s five-year benchmark rate or their contractual rate plus two percentage points. These new rules also take into account housing-related costs and the total debt service ratio.
This not only means some borrowers won’t be able to borrow as much as they had planned, but it could mean you can’t switch financial institutions when you renew. Before you jump head first into the early renewal process, learn more about the stress test to see how it affects you.
Check out all your options
Many banks send letters to their borrowers offering a “renew early and save” offer. It’s important you remember the key reason behind those letters: the bank is doing this because it wants your money, not because it’s focused on saving you money.
The recent Mortgage Consumer Survey shows the top reasons for staying with a current lender is the convenience and the trust already established in the existing relationship. The top reason for switching, on the other hand, was better product terms and conditions. So, if saving money is your biggest concern, it’s important to know your options. A mortgage broker can help you through this process; not only can they let you know if renewing early will help you save money, but they also often offer better rates than those posted. And most banks will offer to hold a rate for up to 120 days, where the offered rate will stay the same, regardless of interest rate changes. This gives you a bit of time to weigh your options.
As the most comprehensive mortgage rate market comparison site in Canada, RateSupermarket.ca compares various brokers as well as the banks, credit unions and other lenders. Rest assured, you can find a better deal by shopping your mortgage rate with us.
This post has been updated.