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When to renegotiate your mortgage?

Published on November 30, 2022 by Naureen Durack

If you have a mortgage, it's a good idea to renew it at the right time. This allows you to renegotiate the interest rate and benefit from more attractive conditions for the repayment of your loan. However, there are a few important things you should know before renewing your mortgage. Find out more about mortgage renewal with your mortgage broker.

When should I renew my mortgage?

Certain events may prompt a borrower to renew a mortgage before the end of the contract. For example, this procedure is interesting when the interest rates of bank loans decrease. The amount of monthly payments depends on the mortgage rate set by your lending institution.

A major change in your life may also justify renegotiating your mortgage. In the case of a divorce, a separation, or a job loss, you may have to re-evaluate your budget. This step will allow you to determine if it is worthwhile to renew your mortgage. If you are adding a co-signer to the mortgage, the terms of the contract should also be reviewed.

The benefits of mortgage renegotiation

Renegotiating your mortgage allows you to benefit from a new interest rate, often lower than your current rate. This option sometimes leads to a reduction in your mortgage payments, allowing you to realize significant savings. The capital set aside thanks to this lower payment amount can be used to finance a new project, such as renovations or the acquisition of a second property. It can also be used to maximize your RRSP and help you prepare for retirement with peace of mind.

Renewing your mortgage is also a solution to secure the advantageous interest rate of your loan. You are thus protected from a possible increase in interest rates that could increase your payments. Renegotiating with your lender allows you to adjust the terms of your mortgage according to your current needs. It is interesting to keep the same amount to be paid back so that you can pay off your mortgage faster.

The disadvantages of mortgage renewal

When you terminate your mortgage early, your creditor may charge you a penalty. In some cases, borrowers have six months before the end of the term to renegotiate their mortgage agreement, without charge. If you do so before that time, you may have to pay a penalty to compensate you for the loss.

The bank may use two methods to determine the amount of the penalties:

  • an amount equal to three months interest. This method is used if you have a variable rate mortgage;
  • the interest rate differential. This method allows the bank to calculate the loss of interest income for the remainder of the mortgage.

Before you renew, you should compare the differential between the penalty and the savings you will realize from the new mortgage. Note that the amount of this penalty may increase as the mortgage term lengthens.

Factors that will influence renewal

Certain factors can have an impact on the renewal of your mortgage. Before taking any steps, it is important to assess your needs. You should also consider your financial situation to determine if the repayment terms are right for you.

The bank may also refuse to renew your mortgage if you do not have sufficient cash flow to make the monthly payments, especially after a divorce or separation. If your budget allows, you can also increase the payment frequency to pay off your mortgage faster.

Also consider whether the terms of your mortgage agreement are consistent with your current financial goals. You may need to refinance your mortgage to complete another project.

Alternatives to mortgage renegotiation

Before proceeding with a mortgage renewal before the end of the term, you must find out about other solutions to reduce your expenses. Two alternatives are available to you.

  • Prepayment.

By paying off your mortgage early, you have the opportunity to reduce the amount of the penalty. Some financial institutions offer their clients the option of paying 15%, 20%, or even 25% of their mortgage per calendar year, which can result in significant savings. You can make one payment the month before your anniversary date and another the month after. This method allows you to double your payment amount, reducing your penalty./p>

  • Mortgage Transfer

Most financial institutions may offer to transfer all or part of a borrower's mortgage when the borrower sells their property. If you plan to move, ask your bank if it is possible to transfer your mortgage to your new home. This way, you keep the same repayment terms of your old mortgage while avoiding paying a penalty.

Renegotiating your mortgage allows you to benefit from an advantageous interest rate and better conditions for your loan contract. To help you in your efforts, do not hesitate to ask your mortgage broker for assistance.

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