The past year brought its fair share of financial strain and you’ll want to cover all your bases before making any big financial decisions this year. Many Canadians will have to do mortgage renewals this year. It will be beneficial to shop around before renewing your mortgage, to make sure you’re getting the best rate available.
Keep in mind however, that renewing with a new lender will require you to pass the mortgage stress test, while if you renew with the same lender, you won’t be subjected to the stress test.
What is the mortgage stress test?
When applying for a mortgage, the stress test helps guarantee you’ll be able to afford your mortgage if rates rise during your term and interest makes up more of your payment than you were expecting. The test can help determine how much you’re able to borrow.
The Qualifying interest rate for the stress test is either 5.25% or 2% higher than your contract mortgage rate, whichever happens to be higher.
In 2020, the minimum qualifying rate was 4.79%. Since mortgage rates were well below 2% for the majority of the year, the stress test defaulted to the then-benchmark rate of 4.79%. However, because both fixed and variable mortgage rates are higher than 3.25 now, the stress test rate defaults to the contract rate plus 2%.
How early should I compare mortgage rates before renewal?
Start shopping for a better mortgage rate a few months before your renewal. Your current lender may ask you to renew your mortgage early , two to four months before your term ends, but renewal statement is required only 21 days in advance of your renewal date.
Most lenders can hold a rate for you for up to 120 days, or four months. Your mortgage broker can supply you with available options with your current lender and other available lenders, so that you will have all the information needed to make an informed decision.
So before automatically renewing your mortgage with your existing lender, be sure to leave enough time for your mortgage broker to analyze your mortgage and let you know your best option.
When to stay with your current mortgage lender
Staying with your current lender can have its perks, but it shouldn’t be the default option. If you cannot find a better rate elsewhere or cannot pass the stress test with a new lender, then it makes sense to stay put. However, comparing mortgage rates as you approach your renewal – if for nothing else than to see what else is out there – is a crucial step to take before landing on this option.
Contact us if you need to see if it makes sense to get out of your current property financing.
Original article: www.rates.ca