The mortgage renewal rate you pick can make a big difference in how much your mortgage costs. With interest rates so low, the time is right to get a bargain if you can.
High Anxiety at Mortgage Signing Time
We say “if you can” because unemployment in Ontario is at historic highs. If you are laid off or looking for work, you may not want to tempt the odds. We can’t tell you what to do. But If that’s the case, you may be glad just to get a mortgage renewal offer and sign off quickly.
Qualifying for an Ontario Mortgage
In good financial times, many Ontarians don’t think twice about switching lenders at renewal time. In fact, you could be turned down if:
- You pay child support or make spousal support payments. Family support is treated as debt.
- You own a small business and use tax planning to reduce your income tax bill. Low taxes equal lower mortgage eligibility. Paying more tax now makes it appear you make more money. That can translate into more mortgage.
- You’ve gone bankrupt. It takes about seven years to rebuild a credit rating.
- You cosigned a loan or mortgage. Mortgage lenders take cosigned debts as your own. Since you could be required to make payments if the purchaser defaults, the amount is added to your mortgage eligibility balance sheet.
Figuring Out Your Non-Taxable Income
Non-taxable income is often one-time only or infrequent. Mortgage lenders may discount it because they can’t rely on non-taxable income to make monthly mortgage payments. Unless you consistently receive income from a non-taxable source, plan to exclude these from your qualifying income:
- lottery winnings, except “pay for life” or interest you invest
- gifts or inheritances
- war vet disability or death benefits
- GST / HST credits
- Canada child benefits
- family allowances
- Quebec handicapped children supplement
- criminal act or motor vehicle accident compensation
- life insurance
- strike pay
- and although some lenders will accept it, usually your TFSA (tax-free savings account).
How CERB Affects Your Mortgage Renewal
Just like starting a new job affects mortgage eligibility, so can being on CERB (Canadian Emergency Response Benefit). You’re welcome to apply for a mortgage with a new lender, but don’t expect to be approved until you go back to work. The mortgage stress test alone could tank your application. Renewing with your existing lender means you won’t need to requalify or take a stress test. Just pick your desired term and sign the renewal. Your mortgage lender knows you’re reliable. Besides, they have your home as equity.
Accept an Early Mortgage Renewal Letter
You kept your job during the pandemic. Congratulations, you have real buying power. Check out what’s in your mail. A letter from the bank or credit union offering to renew your mortgage early, up to 120 days without a penalty. That sounds good. Or does it? Jumping too quickly may mean you miss out on lowering your mortgage interest rate. Switching lenders could save you thousands in interest by reducing your monthly payments. Think about how you could spend that extra money every month. It could be time to move on.
Benefits of Fixed-Rate Mortgages
Now that you’re at the lenders, a dizzying array of options awaits you. Fixed mortgage rates offer steady PI (principal and interest) payments, for up to 10 years, so you can plan ahead. On the con side, COVID-19 has brought interest rates way down, as low as 1.99% for qualified, insured, fixed-rate mortgages. Without a crystal ball at hand, you may not get the lowest rate. Plus penalties for breaking your mortgage increase the longer the term is. Final analysis: Pick this option if your house is your forever home (for now) and then look for the longest term with the lowest interest. That probably won’t be the 10-year rate, but for long-term stability, it can’t be beat.
Variable Rate Mortgages for Long-term Wins
Variable rate mortgages (VRM) win for lowest loan amortization costs. You save big by getting the lowest daily interest rates available and paying off your mortgage faster. VRMs are a bit of a roller coaster ride, so be prepared. You can steady your nerves by choosing set monthly payments. When interest rates go down, more of your payment goes to principal. When they go up, you pay more on interest costs.
Adjustable Rate Mortgages for Short-term Gain
Think bankers’ prime rates will keep dropping or planning to flip? Go for an adjustable rate mortgage (ARM). Adjustable interest rates change every time prime does and are way cheap to get. You may even qualify for more mortgage because your monthly payments are so low. ARMS are tricky. Just like the name says, the interest rate is adjusted or reset throughout the life of your loan. Our advice: keep your mortgage payments on an even keel by setting a limit (or cap) on how much you can afford to pay each month.
Cons of ARM Deals
You hit the ARM cap: any interest left unpaid by end of month is added to principal. Come renewal time, your principal may be greater than when you bought your home. And if interest rates go sky high, you could pay more interest than with a fixed-rate mortgage. It’s a gamble.
Legal Advice for Mortgage Renewals in Ontario
Made a choice? E-sign your mortgage renewal documents online by video conference call. Axess Law Ontario real estate lawyers are available 7 days a week, day or evening, at your convenience. Licensed real estate lawyers assist you online anywhere in Ontario. In person meetings are available at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices. Dial toll free to 1-877-552-9377 or 647-479-0118 in Toronto or use our online booking form to make an appointment.
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