The past year brought its fair share of financial strain. With inflation currently resting at 6.8% and the Bank of Canada’s policy rate hikes having created higher borrowing costs, you’ll want to cover all your bases before making any big financial decisions in 2023.
Take your mortgage, for example. You may have started your term when rates were lower, so it’s worth it to shop around before you renew your mortgage and make sure you’re getting the best rate available this year.
Keep in mind, however, that renewing with a new lender will require you to pass the mortgage stress test. On the flipside, if you renew with the same lender, you won’t be subjected to the stress test.
That said, if you’re able to qualify with a different lender, there may be an opportunity to save.
What is the mortgage stress test?
When applying for a mortgage, the stress test helps guarantee you’ll be able to afford your mortgage if rates rise during your term and interest makes up more of your payment than you were expecting. Your mortgage principal will be put to the test, gaining hypothetical interest at a higher rate than the one you sign up for. The test can also help determine how much you’re able to borrow.
The qualifying interest rate for the stress test is either 5.25%, or 2% higher than your contract mortgage rate, whichever happens to be higher.
“In 2020, the minimum qualifying rate was 4.79%,” says Victor Tran, RATESDOTCA mortgage expert. “Since mortgage rates were well below 2% for the majority of the year, the stress test defaulted to the then-benchmark rate of 4.79%.”
However, because both fixed and variable mortgage rates are higher than 3.25%, “the stress test rate defaults to the contract rate plus 2%,” says Tran.
If you stay with your current lender when your mortgage is up for renewal, you won’t have to undergo the stress test. However, the stress test is required when switching to a new lender.
How early should I compare mortgage rates before renewal?
You can start shopping for a better mortgage rate a few months before your renewal. Your current lender may ask you to renew your mortgage early two to four months before your term ends, but a renewal statement is required only 21 days in advance of your renewal date.
Most new lenders can hold a rate for you for up to 120 days, or four months. So, before automatically renewing your mortgage, be sure to leave enough time to compare your options, regardless of where interest rates are at.
When to switch mortgage lenders
There are a couple reasons you may choose to renew your mortgage with another lender. You may find it can offer you a lower rate, which saves you money and can shorten your amortization period.
“For example, say you save about $1,000 in interest for the next five years (assuming you sign for a five-year term), and it took a total of two hours (cumulative) to go through the entire process with your broker to switch the mortgage out,” says Tran. “That’s basically $500 an hour you just ‘earned’ yourself.”
If you compare mortgage rates and find you’re no better off with the rates being offered by other lenders, you may still choose to look into the conditions of the new product to determine whether it may better suit your financial situation. For example, does your current mortgage offer the right payment frequency for you?
If you can qualify with a new lender at its stress test rate and find a lower interest rate with adequate mortgage conditions, it’s time to switch.
When to stay with your current mortgage lender
Staying with your current lender can have its perks, but it shouldn’t be the default option. If you can’t find a better rate elsewhere or can’t pass the stress test with a new lender, then it makes sense to stay put. However, comparing mortgage rates as you approach your renewal — if for nothing else than to see what else is out there — is a crucial step to take before landing on this option.
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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.