Mortgage renewal: why you should never auto-renew your mortgage

Over the next two years, almost half of all Canadian mortgages will come up for renewal. This is something that typically happens to most mortgage holders every five years or so.

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When they receive their mortgage renewal letter, many homeowners simply accept the terms of their new mortgage contract or ignore the letter altogether, which effectively amounts to the same thing (with most lenders, if you do nothing after receiving your mortgage renewal letter, the terms laid out in it will become your new contract).

While it’s never a good idea to choose an automatic mortgage renewal, now more than ever it can pay huge dividends to look for better mortgage terms elsewhere. We explore the significant potential costs of an automatic mortgage renewal and why a mortgage strategy is a much better option during what some are calling the Canada mortgage renewal shock. 

The dangers of an automatic mortgage renewal

Your mortgage renewal letter will outline key features of your new mortgage contract, which can be significantly different from your previous one, even if it was with the same lender. These include:

  • The mortgage renewal rate.
  • Whether it’s a fixed or variable and open or closed rate.
  • The mortgage term (the length of this mortgage contract, often five years).
  • The mortgage amortization period (how long it will take to pay off the mortgage completely).
  • Prepayment privileges (how much extra of the outstanding mortgage amount you can pay off without paying a penalty).
  • The mortgage payment amount (usually bi-weekly or monthly).

Typically, when they receive their mortgage renewal offer, most people focus on the first point: the interest rate. This is definitely an important aspect to consider: between March 2022 and July 2023, the Bank of Canada (BoC) raised its overnight interest rate from 0.25% to 5%.

These rate changes have an immediate impact on mortgage rates, with most lenders increasing their variable mortgage rates by the same amount as the BoC’s. Fixed rates can also experience an indirect knock-on effect from BoC rate increases. In 2023 and 2024, many five-year fixed mortgage rates more than doubled since homeowners last had a mortgage renewal.

It is exceptionally rare for a lender to send out mortgage renewal rates that are the best they can offer in a mortgage renewal letter. So, it always pays to shop around for a lower rate. However, that’s even more important now, given that some homeowners’ mortgage payments will have increased by 50% or even more with their mortgage renewal – those extremely high mortgage renewal rates are what’s causing the Canada mortgage renewal shock.

However, the mortgage term and amortization period should also be considered when renewing a mortgage during periods of high interest. Firstly, you don’t want to be stuck with an exceptionally high interest rate for another five years, given that mortgage rates are expected to start going down soon.

And maintaining a shortened amortization period could make your mortgage payments extremely difficult to manage. An automatic mortgage renewal could really throw your entire financial plan off course.

Why you need a mortgage strategy, not simply a mortgage renewal

A mortgage strategy is a mortgage built around your overall financial plan: it ensures that the terms of the mortgage fit in with all of your financial goals so that, regardless of what happens, your new mortgage won’t derail them.

With a mortgage strategy, you don’t just get a competitive interest rate, you also get the type of mortgage rate, length of term and amortization period that fit into your budget and keep all parts of your financial plan on track.

Let’s look at an example of how a mortgage strategy can make a big difference when compared to an automatic mortgage renewal.

Mortgage strategy versus automatic mortgage renewal: a case study  

Five years ago, Max took out a mortgage with these terms and conditions:

  • $500,000 mortgage
  • Five-year fixed term
  • 2.5% fixed interest rate
  • 25-year amortization
  • Monthly mortgage payments of $2,240

In those five years, a considerable amount of the mortgage amount (the principal) was paid off, and the amortization period was reduced. Max’s mortgage lender sent out a mortgage renewal letter with these new terms and conditions:

  • $423,190 mortgage
  • Five-year fixed term
  • 5.59% interest rate
  • 20-year amortization
  • Monthly mortgage payments of $2,917

If Max signed up for auto-renewal she would have to make payments that are $677 more than during her previous mortgage term. She was concerned about how this would have an impact not only on her standard of living but also her financial plan. This situation could force her to consider retiring later than planned.

Instead of renewing with her bank, Max contacted her IG Advisor, Jean. They discussed her mortgage in great detail, along with how it should fit in with her financial plan. Max told Jean that she expected annual bonuses of $24,000 per year and that she had $36,000 in unsecured debt, which was costing her $1,200 per month in payments. This would make Max’s total monthly debt payments $4,117 (her mortgage plus debt payments).

Jean worked alongside a partner Mortgage Advisor to come up with a mortgage strategy that would reduce Max’s debt and mortgage payments, and free up more of her income, so she could keep her financial plan on track. Jean suggested that Max take out an IG HELOC to consolidate her unsecured debt payments and extend her mortgage amortization to lower those payments. This was Jean’s mortgage strategy for Max:

  • $423,190 mortgage
  • Five-year fixed term at 5.59% interest rate
  • 25-year amortization
  • Monthly mortgage payments of $2,605

Using a $32,000 line of credit to pay off the unsecured debt reduced her debt payments to $205 per month (at 7.7% interest: prime plus 0.5%), in interest-only payments. Max would pay off the line of credit over three years, using half of her annual bonus. The rest of her bonus would go towards her RRSP. Jean also switched Max’s payments to accelerated bi-weekly, which would knock several years off the amortization period.

This mortgage strategy lowered Max’s monthly total debt payments from $4,117 to $2,810, a reduction of $1,307. Max would be able to maintain her lifestyle and keep her financial well on track.

How to switch to a mortgage strategy

If your mortgage renewal is coming up, before you sign on the dotted line (or ignore it) contact an IG Advisor first. They’ll look over every aspect of your mortgage renewal in great detail and consider the impacts it could have on your financial plan, your disposable income and your lifestyle.

They’ll devise the best mortgage strategy for your situation, with input from an IG Mortgage Advisor. They’ll then discuss the mortgage strategy options available with you, so you get to choose the one you feel most comfortable with.

And, most importantly, your IG Advisor will constantly monitor your financial plan, how your mortgage fits into it and any changes in the mortgage landscape. Therefore, when it’s time to renew your mortgage again, you’ll have an updated mortgage strategy designed to help you reach your financial goals faster.

Contact your IG Advisor to begin the process of getting a mortgage strategy designed just for you. If you don’t have an IG Advisor, you can find one here.

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.

Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.

Mortgage advisors are licensed professionals and equivalent to the following titles per province: Sub Mortgage Broker/Mortgage Broker in British Columbia, Mortgage Associate/Mortgage Broker in Alberta, Associate/Mortgage Broker in Saskatchewan, Salesperson/Authorized Official in Manitoba, Mortgage Agent/Mortgage Broker in Ontario, Mortgage Broker in Quebec, Mortgage Associate/Mortgage Broker in New Brunswick, Associate Mortgage Broker/Mortgage Broker in Nova Scotia, or Mortgage Broker in Newfoundland & Labrador.

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