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An Overview of the Mortgage Renewal Process in Ontario
When you purchase a house in Ontario (or elsewhere in Canada) using a mortgage, in almost all cases the amortization of the note will take longer than the term of the loan that you have taken out. In Canada, you can’t take out a loan that has a term of longer than 10 years, but many mortgages come with an amortization of 20, 25 or even 30 years. When you reach the end of your term but still have a balance due on the mortgage, you have to renew that mortgage for at least one more term.
This protects both banks and consumers. On the bank’s side of things, it keeps them from having to agree to a locked-in interest rate for several decades. On the consumer’s side, it means that if they don’t like the terms of their loan now, they don’t have to follow those terms for the duration of the full amortization period. At the present time, of course, given how low interest rates are, this favors the banks, because it means that if interest rates go up higher than they are now (almost a certainty over the next 20-30 years), they will make more money off mortgages at that time than they will now.
So when it comes time to review your mortgage renewal agreement, Ontario has rules and steps that are consistent with all other provinces across Canada. When you get within 120 – 180 days of the end of your current loan’s term, you should start thinking about whether you want to renew your loan with your existing bank. If you have been making your payments on time, then you should expect renewal to take place without any hiccups. However, before you just sign the form and return it, you should take a more proactive set of steps. After all, your mortgage payment is likely the centerpiece of your budget, and any steps you can take to reduce your interest costs is definitely in your advantage.
Shop for your mortgage renewal starting 120 days before the term expires.
When it comes to mortgage renewal rules in Ontario, in most cases you can start the early renewal process 120 to 180 days ahead of the end of the term. If you try to do it earlier than that, most lenders will make you pay a prepayment penalty, because technically you are breaking your original mortgage term early. At this point, you should start looking at the rates that your current lender is offering, as well as rates that the competition is offering.
You want to look at more than just the interest rate, though. Prepayment options are important to look at as well, because if you can pay down principal early, you don’t have to pay a dime of interest on that, and that can make a huge difference over the life of the loan. You also want to look at some of the terms and conditions that your own bank offers, as far as any changes in the existing interest rate, as well as the rates that the competition offers, as well as any closing costs that could eat into your savings on the new loan.
With mortgage renewal think about your short-term and long-term financial goals.
Whether you sign a renewal for a two-year loan term, three-year loan term a five-year loan term or a ten-year loan term, there are a lot of things that can happen between today and the end of the term. You might have some children who will be off to college by that point, and the costs associated with that are likely to be significant. If you are considering retirement by the end of the term, that should definitely have an influence your financial future. Some other potential events – a child getting married, some upcoming promotions at work, a spouse’s decision to stay home and take care of children – can all influence how much you think you can pay per month now, and how much you will be able to pay at that point.
Consider what you need from your mortgage.
A lot of people just look at a mortgage as a payment they make every month, for years on end, until they get to stop and their house belongs to them. The problem with that is that they end up paying way too much in their interest expense for that policy to make sense. Let’s say you buy a house that costs $800,000, putting down 20% ($160,000), setting up a balance of $640,000 with a 30-year amortization. Your first mortgage starts out at 4% annual interest, leaving you with a monthly principal and interest payment of $3,055. Assuming the rate remained the same with each term, over those 360 monthly payments, you’ll shell out a total of $1,099,965, which means that you are paying $459,965 in interest. So while you paid 4% annual interest, you paid 171.8% of the original purchase price of the house over time – almost twice as much!
How can you avoid this? Prepayment options are key here. Negotiate a loan that will let you make additional principal payments with minimal penalties. Whether you think you can make additional payments each month (in which case you would want to look at monthly prepayment options) or if you think that you’ll be getting an inheritance from Aunt Betty or a big holiday bonus (in which case you would want to look at prepayment options in a lump sum), the more you can pay down now, the more you will save in interest expense later on. If you think that you can satisfy the entire remaining balance in this next term, take a look at prepayment penalties associated with variable and fixed rate mortgages. If you might be moving before the term ends, make sure you get a loan that is portable (meaning you can apply it to your next house) or assumable.
Be ready when your renewal notice arrives.
As you research mortgage renewal, Ontario law provides that your existing lender must send you a renewal statement for your mortgage no fewer than 21 days before the term ends. In most cases, though, you’ll get it with an offer to let you renew it as many as 30 days before the term ends. That fixed offer protects you from any increases in mortgage renewal rates (Ontario is not likely to see volatile interest rate activity within a single month, but the protection is nice to have). By the time you get this renewal notice, you should have done enough research to know whether your existing lender is giving you the best deal out there. If there is a better deal with another bank, now is the time to call your bank and see if they will match that deal. A lot of time, they will, because they want to keep making money from you. If they won’t, be up front with them and tell them that you are considering moving your loan. Many times, that extra push will be just what they needed to give you the deal that you want. If they won’t, don’t be afraid to change providers and speak with a mortgage broker to source out options. There is a little more paperwork involved, and you will likely face some fees (appraisal, discharge, assignment and legal expenses). However, if you have done the math and switching makes more sense, then that’s exactly what you should do. After all, your loyalty belongs to your family and your own bottom line, not to your bank.