Historical article note: This article was originally published on 2018-06-04. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
The longest mortgage contract period in Canada is 10 years, and most borrowers choose contracts within 5 years. Therefore, it is difficult to pay off the entire mortgage within one contract period. Therefore, the vast majority of borrowers need to renew when the contract expires. When does renewal begin, and what are the steps and considerations for renewal? Here are ten suggestions for your reference.
Before talking about loan renewal, we need to talk about five basic concepts. The contract period (term) is the term of the loan contract signed with the bank. The repayment period (Amortization) is how many years it is expected to pay off the mortgage. Renew means signing another loan contract with the original bank. The loan amount, mortgage registration method, and remaining repayment period remain unchanged. Renewal does not require refinancing of the loan, does not look at income, does not evaluate house prices, and does not check credit history reports. Refinance refers to redoing a loan. You can change the loan amount, repayment period, and mortgage registration method. You can stay with the original bank or transfer it to another bank. Switch or transfer means transferring the loan amount from the original bank to another bank without changing the mortgage registration method and the repayment period.
First of all, if you are satisfied with the services and products of the original loan financial institution, what you need to do is understand the early renewal policy. Some banks or financial institutions allow renewal 6 months before the contract expiration date. If the borrower's original loan interest rate was high, but the current mortgage interest rate is low, it is recommended that you renew the contract in advance, terminate the original contract, and start a new contract as soon as possible.
Secondly, if you are satisfied with the services and products of the original loan financial institution, the lending institution allows you to renew the contract N months before the expiration date. However, if the borrower's original loan interest rate is very low and the current mortgage interest rate is high, it is recommended to renew the contract 2 months in advance. Under normal circumstances, if you renew in advance with the original bank, you will lock in an interest rate for no more than one month. Once you choose to renew in advance, the new interest rate will take effect immediately in the next month. For example, the original loan interest rate is 2.09%, the current market interest rate is 3.3%, it is March, and the original loan contract expiration date is July 1st. If you choose to renew in advance on May 15th and lock in an interest rate of 3.3%, then the new contract interest rate of 3.3% will take effect on June 1st. The purpose of renewing the contract two months in advance is to avoid forcing yourself to run out of time to choose, and to prevent the original low interest rate from expiring prematurely.
Third, if you are satisfied with the services and products of the original lending financial institution and the lending institution allows you to renew the contract N months before the expiration date, the original bank's phone banking service will notify and remind the customer that you can consider renewing the contract. When receiving such a call, do not rush to renew the contract over the phone. It is recommended that you call an account manager you are familiar with to discuss the renewal issue. In daily life, pay attention to maintaining a good personal relationship with the account manager. A familiar account manager will understand your needs better and provide more options. For example, the bank internally divides the renewal interest rate into two levels: more than 300 months of repayment period and less than 300 months of repayment period. If the interest rate of the former is high, the borrower can choose to reduce the repayment period to less than 300 months by accelerating repayment, or increase the monthly payment and reduce the repayment period to less than 300 months. An account manager who is familiar with and understands you will be more patient and provide more options.
Fourth, the original bank can renew the contract in advance but is not allowed to lock in the interest rate for more than one month. If the original contract interest rate is low, early renewal will reduce the execution time of the original contract. If the interest rate is on the rise at the time of renewal, the borrower will face a dilemma: if the contract is renewed in advance, the low interest rate will end early; if the contract is not renewed in advance, the interest rate will continue to rise. This situation has been very common since 2018. It is recommended that in this case, you can consider applying for a new loan from another bank and lock in the interest rate for 130 days, that is, 4 months and 10 days. Five months before expiration, you can inquire from other banks other than the original bank and prepare materials, so as to give yourself one more choice.
Fifth, when a contract expires, it is a good opportunity to review whether you have new financial needs. The original mortgage contract signed, no matter how long it is, has certain constraints, that is, many circumstances cannot be changed during the contract period. For example, hoping that the home loan product is not just an installment mortgage loan, but also requires a revolving credit line, if changes are made during the contract period, it will trigger a penalty for breach of contract. Renewal cannot: change the repayment period, change the mortgage mortgage method, and increase the loan amount. To make the above changes, you need to increase the mortgage. Therefore, when the mortgage contract expires, the borrower needs to examine whether he has new needs in these aspects.
Sixth, a floating-rate mortgage loan can be converted into a fixed-rate loan at any time without penalty. This is a common practice of mainstream banks in Canada. However, some small financial institutions do not have this facility, so it is very important to choose a bank when choosing a floating rate. If you choose a floating interest rate for your next loan, you need to ask the borrowing bank two key questions: whether it can be converted to a fixed interest rate at any time without penalty; and how much the early repayment amount is. Large banks often allow borrowers to convert a floating rate to a fixed rate, with less time remaining on the original floating rate contract than the new fixed rate contract period. Once interest rates continue to rise, one of the ways to eliminate the impact of interest rates is to accelerate repayment, so the proportion of early repayment is very important for borrowers who choose floating interest rates. Bank A allows a prepayment limit of 10% every 12 months; Bank B allows a prepayment limit of 20% every calendar year. If today is June 5, 2018, between June 5, 2019, Bank A's early repayment limit is 10%, and Bank B's early repayment limit is 40%, which is a huge difference.
Seventh, in the interest rate hike channel of the central bank, if the loan balance of a self-occupied house is relatively large, for example, more than 300,000, it is recommended to renew the contract to a 5-year fixed interest rate. When investing in a house, just choose the lowest interest rate. This suggestion is mainly based on psychological endurance. When the balance of the home loan is large, the borrower's sleep index will be relatively high when choosing a mid- to long-term fixed interest rate.
Eighth, for investment properties, if interest rates have been low in the past few years, the mortgage principal has dropped rapidly, the value of the house has appreciated, and the leverage effect of real estate investment has been reduced, you can use the opportunity of the expiration of the contract to apply for an additional mortgage, re-increase the leverage effect, and use the house rights taken out for other investments. For investment properties, if the amount of property rights that can be withdrawn when re-mortgaging is twice the investment amount at that time, it is worth re-mortgaging. For example, if you originally paid 70,000 down to buy an investment house worth 350,000, if the amount you take out as an additional mortgage is 140,000, it is worth considering an additional mortgage. When purchasing an investment property, it is recommended to use the longest repayment period, for example, 30 years.
Ninth, if the balance of the home loan is very low and you do not plan to sell the home, you can consider applying for a maximum credit line when the current loan expires, so as to avoid being unable to apply for a large credit line when your borrowing ability decreases in the future.
Tenth, when the owner-occupied loan expires, if you want to replace the owner-occupied house and keep the original owner-occupied house, the first thing to do is to increase the mortgage on the existing investment house, then increase the mortgage on the existing owner-occupied house, and finally apply for pre-approval for the new owner-occupied house.
Active management of household debt does not require too much preliminary knowledge, nor does it require understanding of world events like investing in stocks. You only need to remember one sentence: a home loan is a large consumer loan, which should be paid off as soon as possible. The more stable the loan payment, the more reliable it is. You can use lump sum payment to speed up the repayment; investment housing loans are small business loans, OPM, other people’s money, use them as much as possible, and increase the leverage if you can.