As interest rates continue to tick higher, so do the stress levels of those whose mortgage renewal date is approaching. Many of these borrowers secured a bargain deal a few years ago when interest rates were at historic lows. However, the Bank of Canada has taken away the punchbowl. Interest rates have climbed steadily, and many Canadian homeowners are waking up to the reality that they may have to contend with substantially higher mortgage rates.
It's time to start thinking about making some tough choices as regards to your mortgage renewal. Fixed-rate or variable? An existing lender or a new provider? A three-year term or five? Uncertainty around the direction of interest rates doesn’t make it any easier.
Renewing can be an overwhelming challenge. However, there are a few measures that can be taken to find a good mortgage renewal deal. Assuming they’re well qualified and have paid their current mortgage as agreed, homeowners can start with getting an initial quote from their existing lender, says Robert McLister, mortgage strategist at FixedOrVariable.ca & editor at MortgageLogic.news.
Time to Renew: Where to Begin?
Sites such as WOWA, Ratehub and Compare Mortgages could be handy resources for number crunching for those shopping for a mortgage deal.
Next, call a high-volume broker (preferably those with a prominent online presence), tell them what you’ve found elsewhere and ask for their best deal.
“High-volume brokers tend to have better rates, while lower-volume (boutique) brokers often have more personalized service,” asserts McLister.
The best deal may not be the lowest rate, though, he cautions. A combination of overall borrowing cost (including fees), mortgage feature flexibility and convenience are the ingredients of an ideal deal.
Also, never underestimate the importance of expert advice. “You may also want to pay more for good advice”, says McLister, adding that “there are so many pitfalls in mortgages that a little handholding never hurts, especially if you’re a first-time buyer or have a more complicated application.”
Avoid Rookie Mortgage Renewal Mistakes
There are some common mistakes to avoid during mortgage renewal. One of them is to focus singularly on rates and ignoring features associated with the mortgage that are just as important at the time of renewal. These include portability, prepayment privileges and punitive charges and penalties that a borrower may incur should they decide to break their mortgage.
Another common mistake is to stay with your existing lender for the sake of convenience. “That can be a costly move if the lender is not competitive,” McLister contends. “It can also hurt you if your existing lender’s product isn’t suited to your five-year plan.”
A homeowner would be better off switching to a lender that offers “a flexible, automatically readvanceable mortgage. One that is linked to a line of credit that lets you reborrow mortgage principal payments if needed—for emergencies, investments, business use, etc.,” he adds.
Here’s a short checklist of some desirable mortgage features:
• a longer amortization
• better prepayment privileges
• a variable mortgage with fixed payments
• better portability
• a more favourable refinance policy
• a skip-a-payment feature
“All of these things can save you money and stress,” says McLister.
However, in some cases, it may make more financial sense to stay with the existing lender.
Should You Switch Lenders?
Many borrowers are often faced with this dilemma: should they negotiate a new deal with their current lender, or seek out another lender who might offer a better deal?
The answer may depend on a variety of factors and economic environments.
In the current scenario of low application volumes, high rates and real estate slowdown, McLister leans towards staying with the current lender. “Lenders are desperate for business right now,” he says. “As a result, incumbent lenders often undercut other providers.”
For one, unlike a new lender, your existing lender doesn’t have to pay customer acquisition costs, like banker or broker commissions. You should remind them of this extra profit margin when renegotiating your rate. “Sometimes they try to play hardball, and you have to threaten to leave to light a fire under their b*tts,” asserts McLister.
If you prefer to stick with your current lender, it's a good idea to first identify the most competitive market rates. At the very least, this way you can negotiate a rate match.
Mortgage Rate Windsock
While predicting with certainty is impossible, certain economic indicators can offer insights into short-term mortgage rate trends.
“To understand where the market believes the Bank of Canada is going, watch the 2-year yield with an 18-month moving average,” says McLister, but cautions that it is prudent to look at bond yields in conjunction with “other indicators like CPI, Organisation for Economic Co-operation and Development (OECD) leading indicators, the unemployment trend, the spread between 10-year bonds and 2-year bonds (a popular recession indicator), and energy prices, among other things.”
When to Lock in the Renewal Rate
If your mortgage is coming up for renewal, it may be a good idea to start early. Lock in your renewal rate 120-180 days in advance. That way you can allow yourself some time to watch the rates. If rates go up, you’ve got a pre-arranged renewal rate in the bag. If rates go south, you can take advantage of even lower rates, or have your pre-arranged lender to match them.
Timing is key. Don’t wait for your lender to send renewal reminders. Often these reminders come close to the term's end, leaving borrowers little time to shop around, compare terms, negotiate rates, or, if need be, go with a different lender.
