Renewing into a high-rate environment will come as a large shock to about 76% of Canadian mortgage holders over the next two years. If you are in a standard Triple A (AAA) or B-lending mortgage, your provider is required to offer you a renewal agreement (so long as the mortgage is not in default). However, these renewal rates may not be the cream of the crop. This is where mortgage transfers/switches come into play, offering borrowers the opportunity to secure better terms.
Understanding Mortgage Transfers/Switches Vs. Refinancing
Mortgage transfers/switches and refinances are mechanisms that allow borrowers to move their existing mortgage from one lender to another, or to change the terms of their mortgage with their current lender. While these terms are often used interchangeably, there are subtle differences between them.
A mortgage transfer/switch, also known as a remortgage, involves switching from one lender to another. This could be driven by various factors such as securing a better interest rate or accessing additional features or benefits. A key caveat to these transfers/switches is that no new money is added to the principal and that your amortization period remains on schedule. On the other hand, a mortgage refinance typically involves the advancement of new funds for debt consolidation or investments or extending the amortization of your loan.
Benefits of Mortgage Transfers and Switches
- Cost Savings: One of the primary motivations for mortgage transfers and switches is to secure a lower interest rate. With interest rates fluctuating over time and varying between lenders, borrowers may find better deals elsewhere, leading to significant long-term savings.
- Flexible Terms: Life is unpredictable, and what suited your financial needs when you first took out your mortgage may no longer be appropriate. Transferring or switching your mortgage allows you to adjust the terms to better align with your current circumstances, whether it’s extending the term to reduce monthly payments or shortening it to pay off the loan sooner.
Benefits of Mortgage Refinancing
- Access to Equity: As property values appreciate and borrowers pay down their mortgage principal, they build equity in their homes. Refinancing your mortgage can allow you to pull out equity to fund home improvements, investments, or other financial needs. This does result in a higher loan principal.
- Consolidating Debts: For those burdened with high-interest debts, such as credit card balances or personal loans, a mortgage transfer can be a strategic move to consolidate these debts into a single, more manageable payment with a lower interest rate.
Key Considerations for Borrowers
- Costs and Fees: While mortgage transfers can lead to long-term savings, borrowers should be mindful of the associated costs and fees, including arrangement fees, valuation fees, legal fees, and early repayment charges. Conducting a cost-benefit analysis is crucial to determine whether the potential savings outweigh the upfront expenses. Note; that mortgage transfers/switches are often low-cost options, where lenders may cover an appraisal report, or legal fees as an incentive to bring in your business. Refinances however will often require you to cover the closing costs.
- Creditworthiness: Lenders assess borrowers’ creditworthiness when considering mortgage transfers. Maintaining a good credit score and demonstrating responsible financial behaviour can improve your chances of securing favourable terms with a new lender.
- Market Conditions: Monitoring market trends and interest rate movements is essential when contemplating a mortgage transfer or switch. Timing your move to coincide with favourable market conditions can maximize your savings and optimize your financial outcome.
- Seek Professional Advice: Mortgage products can be complex, and navigating the transfer or switch process may require expert guidance. Consulting with a mortgage advisor or financial planner can provide valuable insights and ensure you make informed decisions tailored to your individual circumstances. If you have a mortgage renewal coming in the next 6-12 months and want to see where you stand, book an appointment with a licensed professional here.
In conclusion, mortgage transfers and switches offer borrowers a pathway to financial optimization by providing opportunities to secure better terms, reduce costs, and adapt to changing life circumstances. However, careful consideration of costs, market conditions, and personal financial goals is essential to make the most of these opportunities. By understanding the essentials of mortgage transfers/switches and refinances and weighing out your options with a professional, you can help ensure you’re getting the most out of your mortgage.
