Planning your mortgage renewal


– Part 2 of 3

Most people only consider what it takes to enter into a mortgage, but the more important question is what it would the take to exit an unsuitable or limiting mortgage? The costs to enter into a mortgage are typically very minimal. Yet, the penalties and costs to break a mortgage are a lot higher and even prohibitive.

Here are some points that every borrower should contemplate before renewing their mortgage. This will ensure that you don’t focus on only the interest rate, but rather plan for the best mortgage that will match your needs for the next mortgage term:


(*Terms & Conditions apply & E.&O.E.)

Your mortgage choice for this renewal will determine what your mortgage will be classified as at the next renewal date. The product you choose now might limit your options when you renew your mortgage at the end of the new term. E.g. Collateral mortgages.

Equity = Appraised value – Mortgage Balance(s)
If you need an estimated value of your property please contact us and we can provide it to you.

How much equity do you have in your property? This matters since it affects you in the following ways:

  • Less than 20% equity – Mortgage rules prohibit the borrower from doing anything with their mortgage other than to renew it as a Switch with a current or new lender.
  • More than 20% equity – You are potentially able to take out equity etc and many more options are available to the borrower than with less than 20% equity

Are you planning to buy a cottage, or a rental property? If the down payment for the new property purchase will come from the equity of your current home, it is important that you plan for this. Either take out the equity from the mortgage and invest it until you need it, or add a Home Equity Line of Credit (HELOC) so that you can take the down payment out later when you need it.

There are a few scenarios to consider here:

    1. More than one mortgage component: If you have more than one mortgage component with the same lender, but each component has a different maturity date you might want to consider combining them into one mortgage, with one, single maturity date. This is important because if you keep them separate the mortgage maturity dates will always be out of sync with each other and this will have at least two serious consequences:
      • You are forced to keep your mortgages with that same lender since you will always have to pay a penalty for at least one of the mortgage options if you want to move your mortgage away
      • Because of the above, you have very little bargaining power and you won’t get the most competitive interest rates from that lender.
        This forced loyalty strategy is hardly ever in the best interest of the client. It might be wise to get out of this scenario by breaking the mortgage component that is not ready for renewal yet. This way you can put yourself in the driver seat for your future mortgage.
    2. HELOC with a balance: If you have been carrying a balance on your HELOC and you have been unable to pay it down it might be worth considering rolling it into your mortgage. Remember HELOCs are interest only and their interest rates are mostly higher than that of the actual mortgage component.
    3. Second Mortgage: Second mortgages typically have higher interest rates than the first mortgage. It might be a good strategy to combine both mortgages into one first mortgage.

If you are planning to renovate your home and cannot do it with cash, the next most cost-effective way to complete your renovations is to take equity from your home through your mortgage. This is a reasonable strategy since you are using equity from your home to add even more equity to your home through renovations.

We are committed to helping clients get and stay out of debt, including mortgage debt. Read all about our Dealing with Debt series here and download the free Debt Snowball file.

To pay off the non-mortgage debt you need increased cash flow. You can achieve this by adding some or all of the debt to your mortgage. You can then use that monthly savings to increase your mortgage payment voluntarily after the refinance. In this way, you can still be mortgage free faster and you won’t have any debt. A good mortgage broker should be able to create a good strategy for you.

The only way that you can know for sure whether you can afford your mortgage is to do a budget.

“If your current cash flow is not sustainable or you are battling to make ends meet it is important that you discuss this with your mortgage broker”

so that they can suggest ways to improve your situation before you renew the mortgage.

It is recommended that you should have between 3 to 6 months in liquid cash savings to protect you against emergencies that could potentially put you in debt. It is not wise to depend on credit for life emergencies since cycles of debt start this way. It might be a good strategy to take out equity from your home and invest it at a reasonable return, but in a way that you can access the money if an emergency requires it. If you don’t have a financial planner we can refer one to you.

Growing families have special financial needs during the maternity/paternity period. As one parent takes off to be the primary caregiver the family income is reduced, but the expenses are not, so it would be a good idea to lower your mortgage period during that time of lower cash flow. Your mortgage broker can arrange a mortgage for you which will allow you to reduce your payments during maternity/paternity absence from work and then increase it again when you are back at work and the family income is normal again.

When you want to pay off your mortgage and be mortgage free is an important part of your overall financial plan. It is something we major in at Mortgage Allies. Since your mortgage is most likely your biggest debt, your Mortgage Broker should be able to help you fulfill your mortgage free goals by getting you the right mortgage and the right lender that will allow the Mortgage Broker to serve you during the life of the mortgage term.

Make sure you have the right mortgage. Depending on your plans, your mortgage should have the right features and flexibility to avoid or minimize penalties and protect your current low-interest rate.

Your credit is one of the 5 “C’s” of the mortgage Covenant and it determines the type of mortgage that you will qualify and the lender that it can be placed with. Even though your credit report contains your personal information, lenders do not review this vitally important document with clients. To ensure that your credit is optimum or to allow your Mortgage Broker to suggest remedial actions that will repair your credit, meet with your Mortgage Broker at least 6 months before the mortgage renewal date.

Philosophies like “Variable rates are always the best”, are dangerous and can be very costly. Market conditions, risk profiles and the housing market change all the time. Instead of using a gut-feel approach, get real data from your Mortgage Broker and get a product that will suit your risk profile.

Unlike principal or secondary residences, rental property mortgages can typically not be renewed at no cost and end up being refinanced. Since different tax laws and mortgage rules apply to rental/investment properties, you should let your mortgage broker review the following:

  • Cash flow – Is the property viable and profitable based on the actual expenses from the past year? If not, it should ideally be remedied.
  • Equity – Are you planning to purchase more properties in the near future? Where will the down payment come from? If it is from the subject rental property then a plan should be in place to withdraw the equity.
  • Rental portfolio – Review the entire rental portfolio, not just from the actual income and expenses, but also from a lenders perspective; they are very different. If you plan to purchase future properties; will you qualify for the new mortgages etc.

Review your current lender’s product offer and terms and conditions and discuss it with your Mortgage Broker. Make sure your new mortgage is the best mortgage for you. Put a lot more focus on what will save you money over the entire mortgage, which is the best mortgage than just on the interest rate. The lowest “miracle” interest rate might reduce your mortgage payment a little every month, but will cost you a lot more in the long run.