Did you know? Close to 70 percent of mortgages never make it to the end of their term. This means that, for a variety of reasons, homeowners are ending their mortgages early. However, that still leaves a solid 30 percent of home buyers who keep their mortgage until the term is up and it is time to renew.

If you are not planning to move in the near future and are happy with your current mortgage, you are likely one of the 30 percent who will renew once the term ends. So what does this process look like?

When it comes time to renew your mortgage, most lenders will send you a renewal letter when there are around 3 months remaining on your term. While nearly 60 percent of borrowers simply sign and send back their renewal without ever shopping around for a more favourable interest rate, this is actually the best time to check out your options with your Mortgage Consultant.

Most standard terms are 5-year terms and, with that much time having passed since signing, the market rates could be very different once the term is up.  Despite this, lenders tend to provide higher rates on renewals versus new clients as they are hoping that the ease of renewal will prevent you from seeking out new rates. However, shopping around for a better rate is not as difficult as it sounds – especially with the help of a Mortgage Consultant– and it could end up saving you a couple hundred dollars a month (depending on your situation).  Ideally, you should be keeping track of your own mortgage term end date as shopping for a new rate between four and six months before your expiry will ensure you are able to find the most affordable option for you.

After speaking with your Mortgage Consultant, you may find that your bank is actually offering a great rate – in which case you can simply submit the renewal. But if you are able to seek out a lower rate, you will thank yourself for putting in the effort to find out.  As another point of interest, renewal time is also a great time to make an extra payment on your mortgage, if you are able.

Beyond renewing your mortgage, homeowners also have the option to transfer or switch the mortgage. This can be done any time during the term of the mortgage but may have penalties associated with breaking the mortgage before the term is up. Transferring to another lender is generally done to get a better rate, but you will need to go through the mortgage process again.

If your mortgage is coming up for renewal and you want to find out what lower rates may await you, contact your Mortgage Consultant.  They can help you find the best option for where you are at in your life now and help you to ensure future financial success.

When it comes to mortgages, it is easy to focus on rates and your current situation, but the reality is that life happens and when it does, rates won’t be the only thing that matter.

First and foremost, the most important thing to remember is that a mortgage is a contract. That means that there is a penalty involved if the contract is ever broken. This is something that every homeowner agrees to when you sign mortgage paperwork, but it can be easy to forget – until you’re paying the price.

Why break your mortgage?

You’re probably wondering why you would ever break your mortgage contract? Well, you might be surprised to find out that 6 out of 10 mortgages in Canada are broken within 3 years and there are typically nine common reasons that this happens:

• Sale and purchase of a new home
• To utilize equity
• To pay off debt
• Cohabitation, marriage and/or children
• Divorce or separation
• Major life events (illness, unemployment, death of a partner)
• Removing someone from title
• To get a lower interest rate
• To pay off the mortgage

It is always important to think ahead when signing a mortgage agreement, but not everything can be planned for. In that event, it is important to understand the next steps if you do indeed need to break your mortgage.

Calculating penalties

Typically, the penalty for breaking a mortgage is calculated in two different ways. Lenders generally use an Interest Rate Differential calculation or the sum of three months interest to determine the penalty. You will typically be assessed the greater of the two penalties, unless your contract states otherwise.

INTEREST RATE DIFFERENTIAL (IRD)

Fixed rate mortgages can be subject to penalties calculated using an Interest Rate Differential (IRD).  In Canada there is no one-size-fits-all rule for how IRD is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used.

However, typically the IRD is based on the following:

• The amount remaining on the loan
• The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today

In this case, these penalties vary greatly as they are based on the borrower’s specific mortgage and the specific rates on the agreement, and in the market today. However, let’s assume you have a balance of $200,000 on your mortgage, an annual interest rate of 6%, 36 months remaining in your 5-year term and the current rate is 4%. This would mean an IRD penalty of $12,000 if you break the contract.  Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.

THREE MONTHS INTEREST

For variable rate mortgages, the penalty for breaking your mortgage is simply equivalent to three months of interest. In some cases, fixed rate mortgage penalties may also be subject to just a three months’ interest penalty. Using the same example as above – balance of $200,000 on your mortgage, an annual interest rate of 6% – then three months interest would be a $3,000 penalty.

Paying the penalty

Waiting out your current mortgage term before making a change to your mortgage is the best way to avoid being stuck in the penalty box.  When it comes to making the payment, some lenders may allow you to add this penalty to your new mortgage balance (meaning you would pay interest on it) if you refinance your mortgage prior to the end of your mortgage term. You can also pay your penalty up front.

If do get stuck in the penalty box, do note that, while only calculators can be great tools for estimating penalties, it is best to call your lender and discussing with your mortgage consultant directly for an accurate number.

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