Mortgages And Refinancing: What You Need To Know

As the end of a mortgage term approaches, many homeowners wonder if their mortgage will renew automatically. While the answer to this question depends on several factors, it is generally true that if the borrower does not take any action and the balance has not been paid, the mortgage may either renew automatically or go into arrears. This guide will explore the nuances of mortgage renewal, including the pros and cons of automatic renewal, and provide an overview of the renewal process.

Does a mortgage automatically renew?

Renewal terms

Renewal Timeline and Communication:

Lenders typically provide renewal terms a few weeks or months before the mortgage renewal date. For instance, TD Bank customers can expect to receive a renewal offer letter about four to five months in advance, with a detailed outline of their renewal options. Federally regulated institutions, such as banks, are required to provide a renewal statement at least 21 days before the existing term ends. This statement includes crucial information such as the remaining principal balance at the renewal date.

Negotiating Renewal Terms:

The renewal terms offered by your lender are not set in stone. You have the option to accept, negotiate, or decline these terms. If you're satisfied with the new interest rates and terms, you may choose to renew without going through the entire mortgage application process again. However, it's important to carefully review the renewal offer and explore other options to ensure you're getting the best deal. Negotiating with your current lender or shopping around for better terms from other lenders can help you secure a more favourable interest rate.

Automatic Renewal:

In some cases, if you don't take any action as the mortgage term nears its maturity date and the balance remains unpaid, your mortgage may renew automatically or go into arrears. For an automatic renewal to occur, the lender must be willing to renew, and the borrower must be notified of the renewal terms in advance. While automatic renewal may seem convenient, it can have potential drawbacks. You may miss out on opportunities to make lump-sum payments, lower your monthly payments, or take advantage of more favourable interest rates or terms offered by other lenders.

Renewal Fees:

Renewing your mortgage may incur additional costs, especially if you're dealing with a private lender or an alternative institutional lender. These lenders may charge a renewal fee, so it's important to carefully review the terms and conditions to avoid unexpected expenses.

Mortgage Strategy:

Rather than opting for automatic renewal, consider developing a mortgage strategy that aligns with your overall financial plan. A mortgage strategy ensures that the terms, interest rates, length of the term, and amortization period fit within your budget and financial goals. By seeking advice from professionals, such as mortgage brokers or advisors, you can make informed decisions that minimise potential costs and keep your financial plan on track.

Pros and cons

Pros of automatic mortgage renewal:

Automatic mortgage renewal can be a convenient option for homeowners as it allows them to forgo the hassle of going through the entire mortgage application process again. By renewing automatically, homeowners also avoid the need to re-qualify for the renewed mortgage and are not subjected to the increased mortgage stress test. This can be especially beneficial for those who may have experienced changes in their financial situation that could impact their ability to qualify for a new mortgage.

Cons of automatic mortgage renewal:

One of the main drawbacks of automatic mortgage renewal is the potential for higher interest rates and unnecessary renewal fees. If homeowners do not carefully review their mortgage renewal offer and explore other options, they may end up with a higher interest rate and additional fees that could have been avoided. Automatic renewal may also cause homeowners to miss out on opportunities to make lump-sum payments towards their principal mortgage balance, which could help lower their monthly payments and potentially qualify them for a better lender or lower interest rate. Additionally, during periods of high interest, an automatic renewal could result in homeowners being locked into an exceptionally high interest rate for an extended period. This could significantly impact their financial plans and make it difficult to manage their mortgage payments.

Other considerations:

It is important to note that the decision to automatically renew a mortgage may depend on the lender and the specific terms of the original mortgage agreement. Homeowners should carefully review the renewal terms and conditions provided by their lender and seek professional advice if needed. Shopping around for better mortgage terms and negotiating with the current lender are also recommended to ensure homeowners get the most suitable product for their financial needs and goals.

Renewal fees

It's worth noting that even if your mortgage renews automatically, you may still be subject to renewal fees. These fees can vary depending on the lender and the specific circumstances of your mortgage. In some cases, lenders may increase the interest rate or impose penalties, fees, or fines linked to any default payments. However, it is unlawful for lenders to increase the interest rate on auto-renewals without proper notification or to impose penalties that are not tied to actual incurred losses.

To avoid unnecessary renewal fees, it is recommended to actively engage in the mortgage renewal process. This includes reviewing the renewal offer carefully, exploring other options, and seeking advice from a professional mortgage broker or advisor. By taking these steps, you can ensure that you are getting the best terms and conditions for your financial needs and avoid paying more than is necessary.

Additionally, it is important to consider your financial situation and goals when reviewing renewal fees. For example, if you have saved up extra money during your original mortgage term, you may want to make a lump-sum payment towards your principal mortgage balance. This can help lower your monthly payments and potentially reduce the overall cost of your mortgage, even if there are associated renewal fees.

Overall, while renewal fees can vary depending on the lender and your specific circumstances, it is important to be proactive and informed during the mortgage renewal process to make the best decision for your financial needs.

Renewal process

A mortgage contract is in effect for a specific period, known as the mortgage term, which can range from a few months to five years or longer. At the end of each term, you must either renew your mortgage or pay the balance in full. Most borrowers renew after multiple terms throughout a 30-year amortization period.

When your mortgage term ends, your lender will typically offer you renewal terms that you can choose to accept, negotiate, or decline. If you do not take any action, your mortgage will usually renew automatically, or default, depending on your current setup and financial standing. However, it is important to note that there is no one-size-fits-all process for mortgage renewal, and it is always possible to negotiate the conditions of the contract before signing.

If your lender is a federally regulated bank, they are required to provide you with a renewal statement at least 21 days before the end of the existing term. This statement must include the remaining principal at the renewal date and specify that the interest rate offered will not increase until this date. The lender must also notify you 21 days in advance if they do not plan to renew your mortgage.

While automatic renewal may be convenient, it is essential to carefully review the offer and explore other options. By not actively considering other choices, you may end up with a higher interest rate and unnecessary renewal fees. Additionally, you might miss the opportunity to make a lump-sum payment towards your principal mortgage balance, which could lower your monthly payments and potentially qualify you for a better lender or lower interest rate.

To avoid these potential pitfalls, it is recommended to start shopping around a few months before the end of your term. Contact various lenders and mortgage brokers to find the best option for your financial situation and goals. You can also negotiate with your current lender, as you may qualify for a discounted interest rate.

Renewal considerations

Mortgages typically need to be renewed at the end of each term, unless you pay the balance in full. The average term length in Canada is five years, and most borrowers renew after multiple terms throughout a 30-year amortization period.

If you do nothing when you receive your mortgage renewal letter, the terms laid out in it will usually become your new contract. However, it is not advisable to accept a renewal offer without exploring other options, as you may end up with a higher interest rate and unnecessary fees. It is always a good idea to shop around for a lower rate and to negotiate with your current lender.

If you have saved up extra money during your original mortgage term, an automatic renewal may mean missing out on the chance to make a lump-sum payment towards your principal mortgage balance. This could help to lower your monthly payments and may even allow you to qualify for a better lender or a lower interest rate.

When reviewing a new mortgage term, you may want to switch from a variable rate to a fixed rate, or vice versa, depending on the economic climate. An automatic renewal may not give you this option.

It is also important to remember that an automatic renewal could throw your entire financial plan off course. A mortgage strategy ensures that the terms of the mortgage fit in with your financial goals and budget.

Frequently asked questions