Becoming a first-time homeowner can often be a harrowing experience, but many find the moment that their first mortgage term expires to be equally nerve-racking.
From different rates and penalties to shopping around for a different lender, exactly what are the perils, pitfalls and practicalities of renewing or refinancing a mortgage?
"Renewal is an opportunity to revisit your monthly mortgage payment to see if it still fits your lifestyle and your financial situation," says Pat Giles, associate vice-president of real estate secured lending with TD Canada Trust.
Maybe there is more income to go around five years after first taking out a mortgage, and making higher payments is now an option to pay down the principal faster. Or maybe children are a reality now, with all the costs that they bring.
Getting the best rate is often the main concern for a lot of people.
But while the lowest rate may be appealing, it may also come with some hidden costs down the road, such as heavy penalties for early payout, or for porting the mortgage to another property should the need to move arise.
"I tend to avoid those [lowest-rate] mortgages just because it's fine to say you're cool with it now but [what if] that day comes where it becomes more problematic," says Lee Welbanks, principal broker at Welbanks Mortgage Group in Toronto.
Mr. Welbanks uses the example of a couple who buys a house together, and then that relationship breaks down during the course of the five-year mortgage term.
"Now you're forced to sell the home, and if one of you can't pay the mortgage you're paying a 3-per-cent penalty on a very healthy balance, in most cases, so if you're talking a $500,000-plus mortgage, that's $15,000 right off the top," he says.
To ensure that the best rates are being offered, George De La Rosa, chief executive officer of Luminus Financial, a Toronto-based credit union, advises prospective mortgagees to look "at a financial institution that has a number of different services available, different terms, different rates."
Another option is to turn to a broker, who could examine 40 or 50 different options.
It's worth shopping around to find the right kind of service, says Michael Marini, a mortgage broker with Dominion Lending Centres in Toronto.
"Speak to brokers and banks about how they're going to help you, not about rates and fees, because that's secondary," he says. "Really it's about: Are you going to budget out and plan for me and show me options that I don't even know myself but that are going to make sense for me?"
When it comes to rates, he says that it's worth questioning if a broker is arbitrarily showing what he considers the best rate on the market, instead of displaying a spread of the available lenders and going over the differences between their penalties.
"I would argue that the majority won't," he says. "I think it's rare and if somebody did that I would applaud them because I think it's doing something that the industry doesn't provide readily."
One example of a complicated situation is collateral-charge mortgages. While a regular, single-charge mortgage will register just the amount borrowed as the liability against a home, a collateral mortgage means an amount higher than the mortgage loan may be registered against the property.
Though that can make it easier to increase the mortgage down the road, when it comes to discharging the mortgage at renewal time and taking it to another lender, it can cause problems.
"The big downside to it is the mortgage becomes nontransferable when you're in a collateral mortgage," says Mr. Welbanks. "So you just can't do a straight transfer out of [the financial institution] when your mortgage expires; you have to pay it off and set up a new one, which incurs additional legal fees."
When it comes to transferring a mortgage to another lender, there will be a fee, and often the client will have to pick it up, but not always.
"Some lenders will pay it, most don't," Mr. Welbanks says. "It can be around $300 – whether it's a payout or a transfer fee, it's typically around the same figure. A payout figure no bank will pay, but a transfer fee sometimes they will."
If a client is looking to refinance their mortgage, rolling lines of credit and other debt into one loan, legal fees and the cost of property appraisal will have to be factored in anyway. While a brokerage may sometimes pick up the appraisal fee, it's one of those things that typically gets paid by the client, says Mr. Welbanks. However, he adds that using a lender's legal services as opposed to a traditional lawyer can be a little cheaper.
But if speed is of the essence, if the refinancing process wasn't started in a timely fashion, he recommends going to a lawyer.
"So we always tell a client on a refinance, if you need this money somewhat urgently, maybe you're using it to close a purchase or something to that effect, you'd want to see a lawyer, pay a few extra bucks … so that you know it will be done on time," he says.
When it comes to a timeline for a refinancing, Mr. Marini says to give it no less than three weeks.
"If anybody quoted less I would worry about it closing in time," he says.