Mortgage Basics #Renewal and Refinancing
Mortgage Basics #Renewal and Refinancing
Should I Switch Mortgage Providers?
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When it comes to managing your finances, every decision counts. One major decision you may need to make with your mortgage is whether to switch your mortgage provider or stay with your current lender. This decision could help you save time and money over the life of your mortgage.
Various factors can influence your decision to switch mortgage lenders, from finding a lower mortgage rate to seeking better terms and conditions that align with your financial situation and goals. Before you make the switch, it’s essential to thoroughly understand the process, potential costs, and benefits of switching mortgage lenders.
Key Takeaways
- Switching your mortgage could help you secure a lower interest rate or better mortgage terms.
- Switching to a new lender will involve completing a new mortgage application and meeting the new lender’s qualifying criteria.
- There may be costs associated with switching your mortgage depending on the lender, how your mortgage is registered against your home’s title and where you are in your current term.
Why Switch Mortgage Providers
There are a few reasons why you may want to switch mortgage providers. Most mortgage holders opt to switch lenders for better mortgages, lower interest rates, or better terms and conditions.
Get a Lower Mortgage Rate
Lower mortgage rates are one of the main reasons borrowers may choose to switch their mortgage. If another lender offers a more competitive rate than their current lender, moving their mortgage could save them thousands of dollars over the life of their mortgage.
Interest-carrying costs make up a large portion of the expenses you will incur over the life of your mortgage, so it makes sense to consider switching lenders for a lower rate. A lower interest rate can lower your mortgage payments, enabling you to save towards other financial goals or put those savings toward your mortgage principal to become mortgage-free faster.
Find Better Terms and Conditions for Your Mortgage
Not all mortgage products are created equal. Some may restrict you and impact your financial flexibility. If a new lender can offer you better terms and conditions on your mortgage, such as better prepayment options, it may be worth switching to help you pay off your mortgage faster or save on penalties should you exceed your prepayment limits.
Prepayment Privileges
Most lenders will allow you to either increase your mortgage payments or put a lump sum toward the principal of your mortgage each year. This is typically a percentage of the remaining mortgage balance at the start of your term, and should you prepay more than that limit, you will be charged prepayment penalties. Taking advantage of prepayment privileges will help you save time and money on your mortgage.
Cost Benefits of Switching Lenders
Switching lenders can have notable cost benefits. If you are switching for a lower interest rate, this can help you save significantly over your next mortgage term. It’s generally best to consider switching mortgage lenders at maturity for a better interest rate to maximize cost savings and avoid penalties for breaking your mortgage term early.
Consider this scenario: you purchased a home 5 years ago for $700,000, put down the minimum downpayment of $45,000, and currently have a 5-year fixed interest rate of 2.55% on a 25-year amortization. Your current monthly mortgage payments are approximately $3,069, and you are approaching the end of your first 5-year term. When it comes time to renew, you will have a remaining mortgage balance of approximately $577,000.
Here’s how switching your mortgage for a better rate can help you save during your next term:
If your current lender is offering to renew your mortgage for a new 5-year term at a rate of 5.98%, shopping around and switching to a lender like nesto could give you a lower interest rate of 4.89%.
By switching lenders, you could save approximately $27,000 over your next 5-year term.
| Big Bank | nesto | |
|---|---|---|
| Interest Rate | 5.98% | 4.89% |
| Monthly Mortgage Payments | $4,103 | $3,785 |
| Total Term Interest Paid | $158,000 | $131,000 |
| Total Term Principal Paid | $88,000 | $96,000 |
| Remaining Mortgage Balance | $489,000 | $481,000 |
| Total Term Interest Savings by Switching | $27,000 |
Your mortgage contract will outline any prepayment privileges, such as increasing your mortgage payments or paying a lump sum amount. Most mortgages restrict the amount you can prepay each year, so check with your lender before exercising this option; otherwise, you could be hit with prepayment penalties. Switching lenders for better prepayment privileges can help you save time and money on your mortgage. By putting more toward your principal, you will pay less interest and reduce the amortization of your mortgage.
Consider this scenario: you accepted your current lender’s renewal option and received a large bonus or inheritance in the middle of your 5-year term that you would like to allocate to your mortgage. Your lender allows a 10% prepayment each year.
If you exercise your prepayment privileges in the middle of your term, you can put $57,700 toward your mortgage principal with your current lender, saving you $9,158 in interest over the term and shaving 3 years off your amortization. By switching to a lender with a higher prepayment privilege, you could prepay a higher amount of your mortgage principal and realize more cost and time savings.
Here’s how switching for better prepayment privileges can help you save time and money on your mortgage:
| Prepayment Privilege of 10% | Prepayment Privilege of 15% | Prepayment Privilege of 20% | |
|---|---|---|---|
| Prepayment | $57,700 | $86,550 | $115,400 |
| Total Term Interest Paid | $149,129 | $144,550 | $139,971 |
| Total Term Principal Paid | $154,742 | $188,171 | $221,600 |
| Remaining Mortgage Balance | $422,258 | $388,829 | $355,400 |
| Amortization (Time) Savings | 3 years | More than 4 years, 3 months | 5 years, 6 months |
| Total Term Interest Savings | $9,158 | $13,736 | $18,315 |
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How to Switch Mortgage Provides
The process of switching mortgage lenders is similar to getting a new mortgage.
Find a Lender With Better Rates or Terms and Conditions
Start by looking for a lender who can offer you better rates or terms and conditions. To find the best deals, you can compare rates yourself or use a mortgage expert who can help guide you through the process and find the best solution for your needs.
Submit a Mortgage Application
Once you’ve found the best mortgage solution, you will need to submit a mortgage application. Switching lenders is treated like a new mortgage, so you will need to go through the entire qualification process of the new lender. This will typically include proof of homeownership through a property tax bill, proof of property insurance, proof of income through an employment letter, payment stubs, T4s or NOA, and a copy of the mortgage statement or renewal offer from your existing lender.
Speak with a Mortgage Expert
You’ll need to speak with your mortgage expert so that they can provide a solution that matches your financial circumstances and mortgage strategy. During this conversation, your mortgage expert will confirm any missing details that your documents cannot provide and make notes for the underwriter. The submission notes will help the mortgage underwriter understand your situation and ensure that the lender offers the best mortgage for your needs. The file submission notes will also address questions concerning your credit report or employment history.
Obtain Approval
Once the mortgage underwriting has been completed, your new lender will provide you with approval and start the transfer process. The transfer process may involve a notary or a solicitor, depending on how your mortgage is registered against your home’s title.
Your mortgage expert or processor will be able to examine your existing mortgage statement and let you know the process and costs involved. They’ll review your mortgage offer to have you sign off on the agreement and then start the transfer process.
Mortgage Transfer Process
Your new lender will provide mortgage transfer instructions to your notary or solicitor, who will help you pay off and discharge your existing mortgage and transfer your remaining balance to your new lender.
Your current lender will provide a payout statement outlining the remaining balance you owe on your mortgage, your renewal date, and any other important information about your current mortgage. To complete the switch, you’ll need to present this payout statement to your new mortgage lender for processing.
This last step involves some costs to move your mortgage to another lender. Switching means you’ll have to pay fees to discharge your mortgage from the old lender and other fees such as appraisal, assignment, and legal fees to the new lender. As an incentive, some lenders waive or cover the cost of some of these fees to secure your business.
You may or may not have to pay for transfer and appraisal fees depending on the mortgage charge registered against your home, the new lender, your loan-to-value ratio, if your mortgage was insured, or the province where your home is located.
If you switch lenders before the end of your term, you may also need to consider penalties to break your mortgage term early. These could be substantial, depending on the calculation used. Typically, penalties are either calculated as the interest rate differential (IRD) or 3 months’ interest, whichever is higher for fixed rates, and 3 months’ interest for variable or adjustable rates.
Common Fees When Switching Providers
While switching your mortgage for a lower rate or better terms can have cost savings benefits, it’s important to ensure that these savings will outweigh any fees you may be required to pay. Some common fees include:
A mortgage discharge fee may be required to discharge your mortgage from your current lender. Federally regulated (FRFI) lenders must disclose the discharge fee in their mortgage contracts. The amount you need to pay will depend on your lender, or in some cases, the province or territory will regulate the maximum amount lenders can charge. This fee typically ranges and could be up to $400.
An Assignment fee covers the cost of transferring the mortgage ownership from the old lender to the new one. Your existing lender may charge an assignment fee of anywhere from $5 to $395.
An Appraisal fee covers the assessment of your property value. You may have already paid this fee when you first obtained your mortgage. When switching lenders, you may need to go through this process again and pay the fee, ranging from $300 to $500. However, this will depend on your loan-to-value ratio and could be covered by your new lender.
Legal fees may be required depending on the type of charge registered against the mortgage. If registered as a collateral charge, you may need a lawyer to complete the legal paperwork to switch the mortgage. Fees vary depending on your mortgage, but typically, they are around $250 or higher. Depending on the charge, your new lender may cover the costs with a slight increase to your mortgage rate. However, you should complete a cost-benefit analysis with your mortgage expert before deciding.
Penalties – If you break your mortgage during your term to switch to a new lender, this is considered a refinance, and you will be required to pay penalties for breaking the mortgage term early. The fees for breaking your mortgage early will depend on your mortgage type. The penalty will either be calculated as an interest rate differential (IRD) or 3 months of interest, whichever is higher.
How Easy Is It to Switch Mortgage Providers?
Switching mortgage providers is generally easy, but it can get complicated if you have a collateral charge mortgage. Some lenders may not accept the collateral charge if it secures other debts, or they could require you to pay off all the debt facilities under it and consider it a refinance at a higher rate.
Frequently Asked Questions
Can I change my mortgage amount or amortization period when switching providers?
You must refinance the mortgage if you want to change the amortization or mortgage amount when switching lenders. This will require you to break your existing mortgage contract for a new one but will provide you with the flexibility to change every aspect of your mortgage.
Can I switch mortgage providers before my mortgage term ends?
You can switch mortgage providers anytime, but breaking your existing mortgage contract may mean you incur additional costs. These can be higher fees and penalties than if you were to wait until the end of your term and switch at renewal.
Is there a penalty for switching lenders?
If you switch lenders at the end of your current mortgage term, there will be no penalties; however, you may be required to pay some fees to move the mortgage. If you switch lenders before the end of your current term, there will be a penalty for breaking the mortgage term early in addition to the fees for moving the mortgage.
Final Thoughts
Switching mortgage providers can be an effective way to save money on your mortgage. Switching your mortgage at the end of your term is more cost-effective unless the savings from obtaining a lower rate or exercising prepayment privileges outweigh the penalties and fees associated with breaking your mortgage early.
Ready to make the switch and save money? Reach out to nesto’s mortgage experts and see how much you can save by switching your mortgage for a better rate or terms and conditions.
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