Switching mortgage lenders at renewal time? Here’s what you need to know

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If you’re one of the 1.2 million Canadians renewing your fixed-rate mortgage this year, you may be wondering: Should I move to a new lender?

Switching to a new mortgage provider at renewal time comes with plenty of benefits. As a new client, you’ll typically be offered a lower rate than what your current lender will give you.

In fact, according to calculations by Ratehub.ca, the average five-year fixed-rate borrower would save $1,860 annually by renewing at the market’s current lowest rate of 4.04 per cent, compared with the average Big Five bank rate of 4.49 per cent.

Switching at renewal is also an opportune time to adjust other features of your mortgage such as prepayment privileges, ability to port and whether the term is fixed or variable. And, because these changes are occurring at renewal time, you won’t face a penalty for breaking your mortgage early.

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But making this change isn’t always straightforward. Depending on the type of mortgage you have, you may incur costs as part of the requalification process. Let’s look at the most common ones and how to determine whether switching at renewal will pay off.

For most borrowers, whether they’ll be stress-tested again when they renew is a big consideration. This stress test, which is implemented by both the Office of the Superintendent of Financial Institutions (OSFI) and the federal Department of Finance, requires borrowers taking out mortgages to qualify at the higher of the minimum qualifying rate (MQR) of 5.25 per cent, or their contract rate plus two percentage points.

This effectively reduces the overall mortgage loan they’ll qualify for, as the higher interest rate inflates their theoretical monthly payment, and the debt ratios assessed by the bank.

The good news is that many switching borrowers won’t be stress-tested at all, as long as they meet specific criteria. Their mortgage must have originated at a federally regulated financial institution – this excludes provincially regulated entities such as credit unions – and there can be no change made to the size of the mortgage loan, or its amortization schedule.

Products such as collateral mortgages, which bundle your mortgage together with a line of credit, cannot skip the stress test in a switch, and will also be subjected to other fees to discharge and port the mortgage.

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This is important if you plan on refinancing as part of your switch – you must calculate whether the cost of passing the stress test or other fees will outweigh the benefit of tapping into your home equity. However, you will also have the option to extend your amortization in this scenario, which will lower your monthly payment size and ease your debt ratios during qualification.

Borrowers can also be caught off guard by the reappraisal process; the new lender will need to undertake the same qualification steps as the original provider to confirm the home’s condition and value. This may entail an in-person visit from an appraiser, at a cost between $150 to $500 – though the new lender may pick up the tab in exchange for your business.

This step can also present a snag if your home needs significant repairs, or if market values have plunged since it was purchased. If these are a concern, it can make sense to stay put with your current bank as they probably won’t require an appraisal of any kind at renewal, though that’s not a guarantee.

There are also costs associated with transferring your mortgage from your current bank to your new one. These include assignment and discharge fees to close the loan and register it with the new lender, and legal fees to sign your new mortgage agreement.

All of these fees can range between the hundreds to about $1,500. Some may be covered by your new lender, but you could be on the hook for at least a portion, so ensure you have the cash on hand heading into the renewal process.

If you’re not comfortable handling a switch at renewal yourself, you could work with a mortgage broker to navigate the process. They can access your debt ratios and built-up equity, make a recommendation for the most advantageous rate, and calculate whether the cost of stress testing will offset monetary gains from switching.

Penelope Graham is the head of content at Ratehub.ca.