A mortgage renewal is a new agreement to extend or renew mortgage terms with your mortgage holder. In Canada, most mortgages arrange monthly payment amounts so that if each payment is made timely, the mortgage will be paid off after roughly 30 years. This is called the amortization period. However, mortgages in Canada have smaller terms and are usually much shorter than the amount of time it would take to pay off the mortgage in full.
You take out a $200,000 mortgage for your home, at 7% interest on a 4 year term. You monthly payment will be approximately $1,317.21, based upon a 30 year amortization period. However, the term of the mortgage is only 4 years so, at the end of 4 years, the mortgage holder can demand payment in full if the mortgage is not renewed. As a result you must either renew the mortgage or obtain a different lender.
If your payments have been made timely, it is usually not a problem to renew a mortgage with the original lender. Often, mortgage renewal is done much like renewing car insurance, the mortgage company sends renewal papers to you, they are signed and returned and the new mortgage is put in place. When you renew, the new mortgage will be based upon the amount owing at the time of renewal. For instance, in the above example, if the outstanding balance at the time of renewal is $190,000 the new mortgage will be for $190,000.
There are other factors to consider before you agree to renew your mortgage on the same terms. Are current interest rates higher or lower than the rate of the old mortgage? Are interest rates forecasted to rise or fall in the coming years? Are you happy with your mortgage holder? What are the costs and fees associated with switching mortgage lenders?
SHORT TERM MORTGAGES VS. LONG TERM MORTGAGES
One strategy some people employ is that they take out the longest mortgage term possible when interest rates are low. When interest rates are high they take out a shorter term and hope that interest rates have dropped by the time they need to renew their mortgage. However, this is not always the best option and you should speak with a mortgage professional before decided on the length of your term.
REVIEWING YOUR MORTGAGE OPTIONS
If your mortgage holder sends you renewal papers, it does not mean you are required to sign them. These papers usually arrive about 4 months prior to the renewal date. This is a good time to reassess your personal financial situation and look into current interest rates as well as the costs of switching mortgage holders, if you desire. Has your income increased since the time the mortgage was last renewed? You may want to consider a mortgage with a higher payment so you can pay it off sooner. Have interest rates fallen? You may want to consider shopping around.
At First Foundation, we can help you assess your current financial situation, as well as whether your current mortgage terms provide you with the best obtainable deal. We will use our resources to help put you in the right position to meet your mortgage needs.
If you are interested in learning more about mortgage renewal, please feel free to contact us today!