This article has been updated from a previous version.
Last month, the Bank of Canada raised its key lending rate from 3.25% to 3.75%. And rates are still expected to increase into 2023 as the Bank strives to curb high inflation and excess domestic demand in Canada.
For those facing an uphill battle with their variable mortgage rate, now might be the right time to ask about an early mortgage renewal.
How the pandemic has affected mortgage renewals
As the pandemic took hold of the economy in 2020, a rush of homeowners inundated lenders with requests for mortgage payment deferrals, which led to delays for other services, such as mortgage renewals. Fortunately, things have normalized since then, and processing times are back to where they were pre-pandemic.
When your mortgage comes up for renewal, your lender doesn’t always re-verify your employment situation. However, if you’re looking to get an early renewal from your current financial institution, or switch to a new lender, it will be harder to qualify if your pay was cut, or if you’ve since become unemployed or self-employed.
Save money by renewing your mortgage early
Under normal circumstances, deciding whether to renew your mortgage early will depend on the type of mortgage you have and the penalties of breaking your mortgage.
Borrowers who got a variable-rate mortgage before the Bank of Canada’s drastic rate increases began this year, for example, may be considering switching to a fixed-rate mortgage to lock in their rate before it rises further.
Those with a fixed-rate mortgage may feel a little more comfortable with the ongoing rate hikes. According to recent RATESDOTCA data, the preference gap between fixed- and variable-rate mortgages has narrowed over the past month. While variable-rate mortgages were popular in August and July, Canadians are now looking at fixed rates to insulate themselves against rising rates.
Yields on Government of Canada five-year bonds — which are the basis for fixed-rate mortgage pricing — have declined, which appears to be leading to a decline in fixed mortgage rates, as well.
Switching to another lender means you’ll have to pay a prepayment penalty and administrative fees. If you have a variable rate, you’ll typically pay three months of interest in penalties. If you have a fixed rate, you can expect to pay either three months’ interest or the interest rate differential (IRD), whichever is higher.
The IRD considers your mortgage rate, your lender’s current rate, and the remaining months left in your term. To calculate your potential penalty, your best bet is to enlist the help of a mortgage penalty calculator and mortgage payment calculator. This will help you determine how much you could potentially save if you switch to a lower rate or secure your current one.
Renewing with your current lender may allow you to break your mortgage without paying the penalty by getting what’s called a blended mortgage. This will give you a rate somewhere in between what you have now and what your lender is currently offering. There may be some administrative fees, but it would likely still cost far less than breaking your mortgage.
The stress test factor
The mortgage stress test was introduced in 2016 to ensure borrowers can afford to make their mortgage payments if interest rates spike. Previously, the test was only for those making a down payment of less than 20%. However, now everyone must be stress tested, even those who are putting down 20% or more on a house.
The stress test is based on a minimum qualifying rate, which is either the Bank of Canada’s five-year benchmark rate (currently 5.25%), or the borrower’s contract rate plus two percentage points, whichever is greater. When rates rise, passing the stress test becomes harder for a lot of borrowers.
If you qualified for a mortgage before the 20% down payment rule change and didn’t have to undergo the stress test, this will be new for you. It may also mean you’re unable to move your mortgage to another financial institution if you want to renew early.
Check out all your mortgage renewal options
Typically, mortgage lenders will offer you the chance to renew your mortgage two to four months before your term ends without having to pay a prepayment charge. And many borrowers will blindly accept the offer without comparing mortgage rates first.
While renewing with your existing lender may help you avoid the hassle of getting all the paperwork required by a new lender, or finding a lawyer, you could be leaving significant savings on the table.
For example, if you have a $250,000 balance on your fixed-rate mortgage with 20 years to go, a 2.69% interest rate, and a monthly payment of $1,346, you’ll pay $30,186.90 in interest over five years. If you’re able to get a rate of 2.09%, your mortgage payment will be $1,274 a month, and you’ll only pay $23,342.55 in interest over the same period. That’s a difference of nearly $7,000 in interest. But remember to factor in any prepayment penalties for breaking your mortgage early, as well as additional administration fees.
The Canada Mortgage and Housing Corporation (CMHC)’s 2022 Mortgage Consumer Survey found that 72% of mortgage consumers gathered mortgage-related information online. Shopping around is one of the best ways to find a lower rate. That’s why many people choose to use a mortgage broker who can guide them through the process. According to the CMHC survey, 95% of respondents used a broker because they were looking for the best rate.
Finding the best mortgage rate in Canada is easy when using RATESDOTCA, where you can easily compare brokers, banks, credit unions and other lenders.
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Compare Mortgage Rates
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.