Renewing your mortgage can be a good decision, but do it wisely. Even if you have a good relationship with your current lender, shopping around might protect you from overpaying.

Figures from the Bank of Canada in June of 1990 put bank rates on five-year fixed mortgages at an average of 14.25 per cent. They have been declining ever since.

Homeowners could renew or refinance at a lower rate and save money by shopping around, but most don’t. Instead, they renew their mortgages at the same or even higher rates thinking it’s the safest option.

Here’s why assuming your current lender’s offer is the best one is a mistake

Depending on your financial goals at the time of renewing your mortgage, you must decide whether you will be staying with your current lender, going with a new lender, or refinancing your home.

If your financial situation has changed during your current loan term, your next one should be prepared accordingly. Your current lender may not be taking this into account. If this is the case, it is unlikely that the renewal rate your lender is offering will be suitable for your current income or overall debt level.

Even if your current lender offers you a lower rate than before, there are often better rates being offered elsewhere. The more you shop around, the more leverage you will have when bargaining with a new lender. Ask if your lender will match or beat the lowest rate you’ve found. If they won’t you should consider you know it’s time to move on.

Don’t forget that your new lender will be less interested in how well you kept up with your previous loan’s payments, and more interested in your current income and credit score.

Are you refinancing to consolidate debt or get cash?

Paying off your current loan by taking out a new mortgage – refinancing – is one way to access money if your needs demand this; managing a debt or paying down a car loan, for example.

Your lender can refinance up to eighty percent of your home’s current value with an infusion of cash. This amount could end up being much more than the principal left on your mortgage, which makes sense if mortgage rates have fallen since the beginning of your last loan term. Of course, there’s not much point in refinancing if it will result in a higher rate and monthly payments, so it pays to shop around.

Whether you decide to renew or refinance you must allow for some time for this process. Start this conversation with your lender or mortgage adviser several months in advance so that you can plan your financial strategy effectively.

Renewing or Refinancing? An overview…

When to do it

Renew: At the end of your mortgage term.
Refinance: Any time during your mortgage term, but there may be fees.

How it works

Renew: You renew your current mortgage with the new terms and perhaps a new interest rate.
Refinance: You may have to requalify for a new mortgage that reflects your current financial situation.

Costs

Renew: None.
Refinance: Some legal and administrative fees.

Which to choose

Renew: Shop around. Ask about interest rates and ways to pay down your mortgage faster.
Refinance: What major aspect in life are you trying to find funds for? A vehicle? Education? Home renovations? Debt?