5 tips for renewing your mortgage

Until recently, homeowners looked forward to renewing their mortgages as they were likely renewing at a lower rate and had several financial institutions competing for their business.

Consumers were negotiating from a position of power knowing they could leave without penalty if their demands were not met.

This is no longer the case as much of the negotiating power has shifted back to the financial institutions due to the expansion of the mortgage stress test.

When your mortgage is up for renewal, your financial institution will mail a letter stating the new term and interest rate of your mortgage. In most cases, you are not subject to the mortgage stress test and are simply signing the letter to renew your mortgage — easy.

Consider moving mortgage

The downside to signing the renewal letter is that you are giving up your ability to negotiate. Unfortunately, if a competitor offers you a better rate you want to accept, you will be subject to the stress test to re-qualify for your mortgage.

As of January 1, 2018, all home buyers, regardless of the size of their down payment are subject to the stress test. The purpose of the test is to assess a buyers' ability to afford mortgage payments at higher interest rates.

Borrowers must qualify based on the greater of Bank of Canada qualifying rate or your contracted rate plus two per cent. It's a federal initiative, so only banks must follow the new rules. However most provincial-run financial institutions, such as credit union, have voluntarily adopted the stress test's higher standards.

If you fail the stress test, you will not be able to move your mortgage and will have to accept the rate your existing lender is offering. If you are confident that you can pass the mortgage stress test, go ahead and shop around.

Gather all of the competing offers and request your current lender match the rate and/or conditions. If they are unable to so, consider moving your mortgage if the discrepancy is large enough and the new lender is willing to absorb most of the start-up costs.

I would also suggest you speak to a mortgage broker as he or she can determine the competitiveness of your renewal offer and your likelihood of passing the stress test.

If it is determined that you can pass the stress test, a broker will lay out the various options so that you are able to make an informed decision.

5 tips

My top 5 tips for someone renewing their mortgage:

• Do not sign the renewal letter that is automatically sent to you in advance of your renewal date. Always speak to someone and negotiate.
• Consider the financial institution's reputation, flexibility regarding pre-payments and rates when deciding on a lender. The stress test makes it much more difficult to change lenders so best to pick one you are comfortable remaining with long term.
• Your credit score is important. Make your payments on time and try to avoid excess debt as the rate you will be offered is risk based. Try to put yourself in a position to pass the stress test so that more lenders will compete for your business.
• If you need a loan, delay applying for it until after your mortgage renews. That loan could be the difference between passing or failing the stress test.
• If you have a loan and are planning to pay it off, do so before you renew the mortgage (ideally a couple of months before). By eliminating that debt, you will be perceived as less risky and will likely be offered a better rate.

I am often asked what term and type of mortgage I would recommend.

When rates were declining, my product of choice was a variable mortgage. However last year, as rates began to rise, I locked into a fixed seven-year mortgage. This was the right choice for me, but everyone's circumstances are different, so find a good broker who can walk you through all your options.

This column is part of CBC's Opinion section. For more information about this section, please read this editor's blog and our FAQ.

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