Introduction to Mortgage Renewal
As your mortgage renewal approaches, you might be wondering how to secure the best possible deal.
In 2024, with fluctuating interest rates, stress tests, and economic uncertainty, renewing your mortgage requires strategic planning.
Don’t worry—by starting early, shopping around, and knowing your options, you can avoid paying more than you need to and potentially save thousands over the term of your mortgage.
Here’s how-
1. Start the Renewal Process Early
- Why it’s important: Most lenders in Canada allow homeowners to renew their mortgage up to 120 days (4 months) before the end of their term. However, some major banks offer an even longer window:
- CIBC: 150 days before maturity
- TD Canada Trust: 120 days before maturity
- Scotiabank: 120 days before maturity
- Pro Tip: This early mortgage renewal window gives you time to compare rates, review your financial goals, and explore better deals without feeling rushed. You can lock in a rate before the Bank of Canada raises interest rates, protecting you from market changes.
2. Shop Around and Know Your Options
- Compare the Market: Don’t settle for your lender’s first mortgage renewal offer. It’s crucial to compare rates from different lenders or work with a mortgage broker who can access exclusive deals. The Canadian mortgage market is highly competitive, and you might find significantly lower rates by shopping around.
- Potential Savings: Even a small reduction in your interest rate can have a big impact. For example, securing a mortgage rate just 0.25% lower can reduce your monthly payments by approximately $85, which amounts to $1,020 annually. Over a typical five-year mortgage term, that’s a potential savings of $5,100!
- Use Online Tools: Many mortgage comparison websites and broker tools allow you to input your mortgage details and receive competing offers. Some of the top tools include:
Beat My Insurance – Post your insurance needs and let brokers compete to offer you better rates.
Ratehub – A popular Canadian mortgage comparison site.
Mortgage Meister– Connects you with local brokers for personalized mortgage deals.
- Market Insight: In 2024, Canadian mortgage rates are expected to remain volatile due to fluctuating economic factors such as inflation and bond yields. Staying informed about these trends will help you choose between fixed and variable rates.
3. Consider a Shorter-Term Fixed Rate
- Flexibility with Interest Rates: While many homeowners traditionally opt for five-year fixed terms, choosing a shorter fixed term (e.g., 2-3 years) can give you flexibility. In a volatile interest rate environment, shorter terms allow you to reassess sooner and potentially benefit from future rate drops.
- Example: If you lock in a two-year term at a slightly higher rate, you might end up saving in the long run if rates decrease by the time your term ends, giving you the chance to refinance or renew at a lower rate.
- Strategic Planning: A shorter-term fixed mortgage also allows you to adjust more quickly to any changes in your personal finances or market conditions. This strategy is particularly beneficial if you’re anticipating selling your home, moving, or if you believe rates may drop soon.
- What the Experts Say: With bond yields and interest rates still fluctuating, many experts recommend shorter terms for mortgage renewals in 2024. You can monitor Canadian bond yields to understand the direction of fixed rates. Check the Government of Canada’s 5-year Bond Yield, as it plays a significant role in setting fixed mortgage rates.
4. Make a Lump Sum Payment Before Renewal
- Reduce Your Mortgage Size: If you have extra savings or have recently come into some money, making a lump sum payment before your mortgage renewal can significantly reduce your mortgage principal. This can help lower your monthly payments or shorten your amortization period.
- Financial Benefits: By reducing the size of your mortgage, you’ll pay less interest over the remaining term. Even a small lump sum payment can make a significant difference over time.
- Example: If you make a $10,000 lump sum payment on a $300,000 mortgage with a 3.5% interest rate, you could save roughly $5,500 in interest over the remaining term.
- Prepayment Privileges: Most Canadian lenders allow lump sum prepayments of up to 15-20% of the original mortgage amount annually without penalties. Confirm your prepayment limits with your lender to avoid extra fees.
- Tip: If you regularly receive bonuses or other income windfalls, consider making accelerated payments to chip away at your principal faster.
5. Does Mortgage Portability Help?
- What is Mortgage Portability: Mortgage portability allows you to transfer your existing mortgage, along with its current terms and interest rate, to a new property if you’re planning to move before the end of your mortgage term. This can help you avoid prepayment penalties and lock your current rate in a rising interest rate environment.
- Why It’s Important: If you’re considering moving to a new home during your mortgage renewal period, portability can be a valuable feature. It saves you from breaking your mortgage early, which often results in significant fees or penalties.
- Example: Suppose you’re locked into a mortgage at 4.0% with three years left in your term. If interest rates have risen to 5.0%, mortgage portability allows you to maintain your 4.0% rate on your new home, avoiding the need to refinance at a higher rate or pay prepayment penalties.
- Check with Your Lender: Not all mortgage products offer portability, so it’s important to confirm this feature with your current lender. For more information, check your lender’s portability policy.
6. Understanding Your Prepayment Penalties
- What Are Prepayment Penalties: If you decide to break your mortgage early—either by switching lenders or paying off your mortgage in full before the term ends—many lenders will charge you a prepayment penalty. This fee compensates the lender for the lost interest.
- Types of Penalties: Prepayment penalties are typically calculated in two ways:
- Three Months’ Interest: A flat fee based on the interest you would have paid over a three-month period.
- Interest Rate Differential (IRD): This is the difference between your current rate and the lender’s current posted rate for a similar mortgage. IRD penalties can be significantly higher than a three-month interest fee, especially if rates have fallen since you locked in your mortgage.
- Example: If you have a remaining balance of $200,000 and are paying a 3.5% interest rate, your prepayment penalty could be around $1,750 (three months’ interest). However, if rates have dropped significantly, an IRD calculation could result in a penalty of $5,000 or more.
- How to Avoid Penalties: Before switching, ask your lender about prepayment penalties during mortgage renewals. Some lenders may offer penalty-free switches within certain time frames, so it’s important to know your options.
7. Interest Rate Trends & Stress Testing Rules for 2024
- Interest Rate Trends: As of 2024, interest rates in Canada remain unpredictable due to ongoing economic changes and inflationary pressures. The Bank of Canada has hinted at possible rate hikes to control inflation, though some experts believe we might see a rate stabilization or even a slight decline mid-year.
- Next Rate Announcement: The Bank of Canada’s recent rate announcement was set for 0ct 2023rd 2024. Keep an eye on these announcements as they directly impact variable-rate mortgages and could influence fixed rates. You can track updates at the Bank of Canada’s official page.
- Impact on Mortgage Renewals: If rates rise, renewing early at a fixed rate can help you lock in a lower rate and protect against future increases. But if you believe rates will drop, a variable rate could provide savings in the future.
- Stress Testing Rules: As part of the Canadian mortgage stress test, when renewing your mortgage, lenders will ensure you can afford payments even if rates rise. You must qualify at either your contract rate plus 2% or the Bank of Canada’s posted rate, whichever is higher. This ensures that even if rates go up, you can continue making payments.
- Example: If your mortgage contract rate is 5%, the stress test will require you to qualify at 7% (5% + 2%) to prove you can handle future rate increases.
- Tip: Check the current qualifying rates and stress test rules before renewing to understand how much mortgage you can comfortably afford.
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