What’s the Difference Between a Mortgage Switch and Mortgage Renewal?
When you get a mortgage for the first time, you’ll typically have a 25-year amortization and a 5-year mortgage term. This means that if you make your minimum payments on the mortgage, you will renew your mortgage 4 times (every 5 years) and have no mortgage remaining by the end of 25 years. Like clockwork, around 5 months before your mortgage maturity date (end of your term) you’ll get a mortgage renewal offer from your lender.
A renewal and a switch is often used interchangeably, but they fundamentally refer to the same thing. You are always renewing your mortgage, regardless of if you switch lenders or not. The key difference is that if you decide to go to another lender it’s a switch.
“You are always renewing your mortgage, regardless of if you switch lenders or not. The key difference is that if you decide to go to another lender it’s a switch. “
What you may not know is you don’t need to wait until your maturity date to lock in a lower mortgage rate, you can technically renew or switch lenders at any time. However, when you switch mortgages outside of your early renewal window (typically 1-4 months prior to your maturity date) you will be charged prepayment penalties by your lender.
This Sounds Complicated. Why Bother Switching Lenders?
People usually switch lenders to get a better rate. Switching mortgages before the term ends can sometimes also make sense if interest rates have fallen a lot since you got your mortgage.
Getting a better rate can save you a lot of money over the life of your mortgage and is easy to assess. However, if you are breaking your mortgage early for a better rate you need to factor in all the expected costs/penalties to properly evaluate your real savings.
How Do I Get a Lower Rate?
One proven way to get lower rates at renewal is to research rates you could get elsewhere. It’s simple to do this if you have the right resources at your disposal to monitor rates and leverage market offers.
Monitoring rates can be done by you manually, but we’re going to assume you have better things to do with your time. Here are two ways you can outsource rate monitoring to a representative or technology:
- If you work with a mortgage broker and they have your existing mortgage details, they may notify you when a good offer becomes available.
- Perch users with an existing mortgage get free access to our Pathfinder tool. This tool automatically scans over 1,000 mortgage offers every week and then calculates the net benefit of switching to you (which includes penalties) and notifies you when rates are low enough to warrant switching.
Leveraging market offers means that you don’t let your lender give you an offer without having done your research beforehand. Many of our borrowers will run our mortgage offers tool within their Perch profile to get a list of all the current best offers, download/print the PDF and take it into their branch appointment with them.
What Are The Steps to Switching Lenders?
What if your lender won’t match the offer? Maybe it’s time to switch.
From start to finish, if you had all your documents ready, you should be able to get your pre-approval and mortgage approval done within 1 week and it shouldn’t take more than 1-2 hours of your time. Considering you could save between 0.25%-0.50% off your mortgage rate, which translates to $60-$120 per month for 5 years on the average mortgage, those few hours are well spent. Here’s what you need to do:
1. Confirm The Penalties (If any)
If you’re switching lenders before your maturity date, then you will likely incur penalties for breaking your mortgage early. Note that all lenders are required to give you a total cost estimate to pay out your mortgage if you request one, which your mortgage representative should advise you to do before you move forward on any other offers.
2. Make Sure You Qualify
Before you reject your lender’s offer, you need to make sure you qualify at a new lender. Your mortgage representative can go over this with you as part of the pre-approval process.
3. Get Your Mortgage Approval
Once you’re ready to move forward, your mortgage representative will submit your application to the new lender. If you are approved, you will get a commitment letter that outlines all the terms/conditions required.
4. Set Money Aside (Maybe) For Closing Costs
If your mortgage is a standard charge mortgage, the lender usually covers the legal costs relating to the switch. You’d only be responsible for paying the discharge fees (typically around $300) and any penalties to your existing lender. If your mortgage is a collateral charge mortgage (common with some of the Big Banks or if you have a Home Equity Line of Credit), then you would also need to cover legal costs (which would be around $1,000-$1,500).
If you’re a bit short on cash, most lenders allow you to add up to $3,000 of these closing costs to your mortgage amount if you switch mortgages. Depending on your mortgage representative, you may also be entitled to cashback as part of your closing to help offset most (if not all) of the closing costs incurred.
5. Renew Your Mortgage
Once you’ve gotten your approval and set your renewal date, your mortgage representative will take care of the rest. Your old lender gets paid out by your new lender and your mortgage payments start going to the new lender from that point forward. You may have to get re-oriented with a new client portal or mobile app, but it’s really that simple and can cost you next to nothing (or in many cases $0).