A mortgage renewal is the most critical time to avoid pitfalls and mistakes. Due diligence is in order here, and borrowers must shop around, get honest, straightforward information, and watch out for hidden fees. Quite often, getting the best possible deal means dealing with a private lender who can oversee a bad credit score for the right amount of equity. Here’s how to avoid common pitfalls in mortgage renewals and find the products that are right for you.
Failing to Shop Around for Better Rates
Many borrowers automatically renew their loans at the end of a term. However, they could miss better terms if they don’t shop around in advance. Remember, even a slight increase in interest rates can affect the cost of a loan.
Consider the scenario where a borrower with a $300,000 mortgage amortized over 25 years at 5% will pay $1745 monthly. If the interest rate goes up to 6.5%, there will be an increased monthly payment of $264.
When shopping around and comparing offers, consider the total costs, including additional fees and penalties for early repayment.
Pro Tip
All borrowers should understand that they should expect to get detailed, honest, and transparent information about any changes when renewals come up. This information should include fees and interest rates. The Financial Services Regulatory Authority of Ontario (FSRA) oversees these rights for borrowers.
Ignoring the Fine Print: Hidden Fees in Mortgage Renewals
When renewing a mortgage, reviewing all the documents involved is essential. This includes talking with the mortgage or real estate lawyer and reviewing any renewal agreement.
Some of the fees that you should keep an eye on include:
- A lender can charge for renewal processing, usually between 2% and 4%.
- Brokers can also throw in a fee that matches those of the lender. Their fees are generally the same.
- Because a private mortgage is based on equity, an appraisal is essential to finding the market value. Appraisal fees here run around $500 CDN plus HST to appraise a single-family dwelling.
Pro Tip:
Setting aside extra money to cover certain upfront fees is always a good idea. For example, private lenders charge a combination of lender, broker, and legal fees for their services. Although these are not considered hidden fees, they range from 4% to 8% of the total loan amount.
Getting the most from your mortgage renewal also means looking at the big picture.
Not Considering Your Long-Term Financial Goals
When borrowers try to manage their finances, they usually have more to consider than their mortgage. Another common pitfall when renewing a private second mortgage or a traditional one is not thinking about long-term goals.
If you don’t get this part of the equation right, you can fall short and need to refinance under unfavourable conditions, which will increase your costs.
- Renewal of a traditional mortgage for a home renovation requires a good credit score and several years of verifiable income. If one of your goals is to update and sell the property, a private second mortgage can provide the money with a faster approval process. This allows you to take advantage of a seller’s market. This is a consideration if you’ll need more space when planning a bigger family.
- Maybe you’re considering starting your own business. If that’s one of your long-term financial goals, it’s a mistake not to consider what a traditional mortgage renewal will require. Regarding income requirements, banks generally look for several years of steady income and even an employment letter. On the other hand, private lenders have a more streamlined, flexible process that considers contracts and sole proprietorships. Renewing with a private second mortgage can provide money faster, so there’s cash during a startup period.
Pro Tip
When renewing a mortgage, consider your long-term financial goals. However, unexpected expenses like a roof repair can crop up quickly. That’s where a private second mortgage with a one-year term can provide money for this short-term solution.
Choosing a Mortgage Rate Without Understanding Market Trends
A private second mortgage is based on equity and the market value of your home. Another big mistake concerns your timing and renewing at the wrong real estate market cycle.
If the market is declining, renewing a fixed-rate traditional mortgage can put borrowers in a bind for several years. This is especially true if they want to consolidate high interest-rate loans like credit cards into one monthly payment.
A better temporary solution is a private second mortgage, which lasts one year and can be renewed. This can allow a borrower to get the money to pay down some of these loans with an interest-only loan and quickly fix this kind of financial issue without a long commitment.
Market trends aside, many borrowers don’t have any luck looking for a bank loan renewal if their credit score has been damaged.
Pro Tip
Checking the Bank of Canada’s interest rate announcements can give you a good idea of the market’s direction. When interest rates go up, borrowing generally becomes more expensive. It’s good to keep an eye on these rates, as they affect other lender’s numbers. Interest rates affect home prices and overall demand.
Overlooking the Impact of a Low Credit Score on Your Renewal
Another pitfall that can be avoided is overlooking the impact of a low credit score on a renewal. You’ll need to accept stricter terms and higher interest rates even if you can get a renewal with a bad credit report.
Although you can check your credit report from TransUnion or Equifax to look for any errors and make timely payments, there’s another way to successfully renew.
A private lender takes a different approach from a bank and accepts applicants with these credit issues. They focus more on the equity you’ve built up in a property than your credit score.
Private lenders focus on the loan-to-value (LTV) ratio, which measures the percentage of the property’s value owed in mortgages.
Here’s an example of how the formula works:
A homeowner has a $500,000 first mortgage on a property worth $1 million. They are asking for a $250,000 second mortgage. Here, the LTV ratio for the mortgage being requested is up to 75% of the property’s value. The loan amount equals the total of the old loan added to the new loan. That’s divided by the appraised value of the property.
LTV = Total Loan Amounts / Appraised Value of the Property.
Pro Tip:
Obtaining the correct information and considering the benefits of private loans are essential to avoiding problems with mortgage products and renewals.
Jonathan Alphonso is a real estate expert who can supply private mortgage products and tips on renewals. Get more information at one or both of the websites he maintains— www.mortgagebrokerstore.com and powerofsalesontario.ca.
