Stay or Switch? A Strategic Guide to Navigating Your Mortgage Renewal
If you have a small mortgage and less than 10 years remaining on your amortization, the savings from switching shrink fast
Only four out of ten mortgage holders intend to shop around at renewal, a fresh poll from Toronto Dominion Bank reveals.
If this data is right, that leaves six out of 10-plus million residential mortgagors in this country that are either:
(A) content with their existing lender
(B) reluctant to reapply elsewhere
(C) effort-averse (read: lazy) when it comes to shopping around
(D) blissfully unaware that switching could save them real money.
Let’s walk through each one, on the chance you’re sitting in one of these buckets.
When to be happy with your lender
Here are five reasons why you shouldn’t bother changing lenders at renewal:
1. Your mortgage meets all your current and future needs. If you think you might move, it has flexible portability; if you might need more money before maturity, it has solid mid-term refinance options; if you might exit the mortgage early, it has fair early-breakage penalties. Or, maybe your mortgage has a low-cost HELOC on tap for emergencies and the occasional too-good-to-pass-up opportunity.
2. You get a great renewal offer. If your lender’s renewal quote is actually competitive, versus what you see on mortgage rate comparison websites for a similar mortgage, and number one above is true, staying put is probably the right call.
Pro tip: Don’t forget to ask for “relationship” pricing if you have other accounts with your lender. Non-mortgage business increases your “lifetime value” to them and justifies bigger discounts.
3. Your mortgage is modest. If you have a small mortgage relative to your income and less than 10 years remaining on your amortization, the savings from switching shrink fast. In that case, it’s potentially not worth the switching costs ($250 to $1,000) and the inconvenience of applying elsewhere, providing documents, coordinating with a mortgage lender or broker, navigating the approval process, arranging an appraisal (if the mortgage is uninsured), signing and reviewing mortgage contracts, arranging your closing, setting up new payments, learning a new lender portal, etc.
By comparison, some online renewals need just one glorious click.
4. You can’t qualify for a better mortgage. Sometimes you’re handcuffed to your current lender because the income you can document doesn’t measure up against your debt load. Or perhaps your credit score has wandered into territory where the only lenders willing to take you charge rates that make your renewal offer look like a gift.
5. Complexity. Some homeowners have multiple borrowing accounts (e.g., for investment borrowing or laddered borrowing in segregated credit lines). When the structure is that intricate, a decent renewal rate can beat the ordeal of rebuilding the whole setup at a different lender.
In other words, the devil you know often beats the devil who makes you fill out fresh paperwork.
When not to be happy with your lender
Here are three reasons why you should think about switching lenders — and by think about it, I mean do it:
1.Your lender is trying to fleece you. Given how competitive mortgages are these days, this happens far less than it used to, but we still see renewal offers with absurd posted or “special offer” rates (which aren’t special). Lenders pull this because they’re quietly hoping you won’t notice until it’s too late.
If your lender plays hardball and won’t negotiate, doesn’t provide its best offer up front or leaves you hanging until 30 days before renewal, don’t let them play you for a fool. These are solid cues to walk away.
Sometimes a lender simply lacks the funding to price competitively on the term you want. Mortgage finance companies, for example, might have terrible one- or two-year rates.
Even a 15-basis-point rate gap on an average $300,000 mortgage adds up to a few thousand dollars across a five-year term. For many borrowers, that outweighs the friction costs of switching.
One more thing: factor in any rebates when running the numbers, since most major lenders now dangle cashback as bait.
2. Your existing lender’s policies create risk. For example, if there’s a coin-flip chance you’ll move before maturity, make sure your lender offers a generous porting window (90-plus days) and allows flexible top-ups at fair, transparent rates should you need extra borrowing power for a pricier home. Otherwise, you could face a costly prepayment penalty because you need to redo the entire mortgage.
And if there’s a meaningful chance you’ll break the new mortgage and not return to the lender, your existing lender’s penalty policy suddenly matters a lot more. Big-bank penalties on fixed
“I normally say don’t take a big bank fixed mortgage unless you have a high probability of making it to the final year,” says Matt Imhoff, chief executive at Prepayment Penalty Mentor.
“With one year left, it’s very difficult for the bank to create a large penalty, only having a one-year multiplier.” In most situations, breaking a bank mortgage mid-term will result in a bigger penalty than you saved on the upfront interest rate, or on a new rate elsewhere.
3. You need more flexibility.Your current lender might not have the product you need, like a mortgage with flexible refinancing, a cost-effective shorter term, reasonable portability or a readvanceable HELOC.
This last one is especially popular. Readvanceables give you a valuable pool of funds for emergencies, investments, providing a family loan or down payment or whatever else life decides to bill you for. The credit line is tied to your mortgage so that your borrowing power grows as you pay down mortgage principal.
Whatever the case, if your existing lender can’t provide a key feature at a good rate, staying for a puny 10-basis-point rate savings is a losing trade.
One closing stat worth chewing on: that same TD poll found just nine per cent of homeowners plan to start renewal shopping early.
In a rising rate environment, that’s often a bad decision. Some lenders let you lock in a rate as early as six months ahead of renewal.
Whether doing that is the smart play hinges largely on whether you’re sitting in the right mortgage product to begin with.
By Robert McLister:
