What happens when your mortgage approaches maturity?

2016-07-13 | 08:07:01

Let's say you have just purchased a home. And let's say you have a 25 year amortization (total number of years in which to pay back the loan) with a 5 year term. If you have a fixed rate mortgage and make the minimum payments without any extra payments, your remaining amortization at the end of the 5 year term will be exactly 20 years.

25 - 5 = 20. Makes sense, right?

If, on the other hand, you have a variable rate mortgage which drops during your term, or you make any extra payments, your amortization at the end of 5 years will be less than 20 years.

Either way, as your term approaches maturity, you must decide what to do for your next term. Will you choose another 5 year term? Will you stay with the same lender? Will you refinance? Here are a few things to keep in mind as you contemplate your best course of action:

Lenders have high retention rates. As your mortgage approaches maturity your lender will likely contact you and offer to renew your mortgage without re-qualifying you (a.k.a. "hassle free"), but at rates that are often higher than what they are offering to their new clients. And why not? They figure they have their foot in the door with you, so what have they got to lose? Indeed, most of the time they guess correctly because retention rates are typically around 80% to 90%. With that in mind, you might want to shop around before you sign your lender's renewal letter.

Switching lenders might make sense. As your term approaches maturity you have some important decisions to make. You have fulfilled your end of the agreement by making your mortgage payments on time throughout the entire term. But let's say you have not been completely satisfied with the lender's customer service or can find a better rate elsewhere. Switching might not be such a bad idea. Consider this analogy: Let's say you are a professional football player and have completed a 5 year contract with your team. But you realize there are better teams (lenders) out there and you have a better chance of winning the championship (saving money) if you sign with one of them. Should you not have the option to "test the waters of free agency?"

Will you have to re-qualify if you switch lenders? Yes. The new lender knows nothing about your current situation.

Will you have to dig up some of your income documents and put a little time and effort into the process? Yes.

Will you have to pay a discharge fee from the outgoing lender? Yes. The amount is usually around $300, but as long as the new lender is offering a lower rate that not only offsets this fee but also saves you money in interest payments, it's worth considering.

Will you have to pay legal fees? No. Any legal fees involved in a switch are usually covered by the new lender.

Will you have to pay a penalty? No. As long as you structure the new mortgage so that it does not close prior to the maturity date you will be fine. It is always wise to select an open term with your existing lender that kicks in the day after your maturity date, just in case the new mortgage with the new lender does not close on time.

If you are thinking of consolidating debt or borrowing more money for renovations, timing it so that it coincides with your maturity date is an excellent way to save money. Restructuring your mortgage is known as refinancing. Unlike a switch, refinancing requires a new mortgage to be registered with the municipality/province in which you live, so you will be required to pay legal fees. But unlike refinancing mid-term, you will not be triggering a pre-payment penalty if you time it so that the new mortgage closes on the maturity date of the existing mortgage. You can even extend the amortization if needed. But as with switches, it would be a good idea to create a buffer by selecting an open term with your current lender to cover any closing delays.

One last thing. Your existing lender is not obligated to renew your mortgage, even if you want to stay with them. If your income or credit situation has taken a significant turn for the worse, your lender has the right to call in the loan, meaning you will have to scramble to find a new lender to pay out the current mortgage.

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