What happens at the end of your mortgage term?
By ATB Financial 13 December 2019 4 min read
When a mortgage reaches the end of its term, and there’s principal still owing, it will come up for renewal. Your financial institution may notify you in advance to let you know of your maturity date and your renewal options. At this point, you’ll want to look at your current situation and decide how you’d like to renew your mortgage.
While we can’t predict the future, thinking about where life might take you in the next three to five years can help figure out the kind of mortgage that’s right for you.
When you renew, you’ll need to decide between a fixed vs variable rate, closed vs open mortgage, your preferred term length and payment schedule. This article provides a brief overview of these options along with some practical scenarios.
Understanding different mortgage types
There’s a wide variety of types of mortgages available, which can feel overwhelming when you’re weighing your options. Some common questions include:
- Should I have a fixed or variable rate?
- Isn’t securing the lowest interest rate always the best?
- What happens if I move or my life situation changes?
- How long should I lock in for?
Let’s start with interest rates:
Fixed vs variable interest rates
When you select your mortgage, you have the option to select a fixed or variable interest rate.
With a fixed rate mortgage, your interest rate and payments won't change for the term of your contract. Because the rate is guaranteed not to change, it's usually higher than the variable mortgage rate over the same term. If rates are expected to go up in the near future or if you have a strict budget, you may want to go fixed and lock in at the current low rates.
With a variable rate mortgage, the interest rate changes according to your bank's mortgage prime rate. When the interest rate drops, more of your payment goes towards the principal (your original borrowed amount). When the interest rate increases, more of your payment goes towards interest. If your payments no longer cover the required interest, your payment amount will go up. If you think it'll be a couple of years before rates rise and you can handle some potential fluctuation in your payments, a variable rate can save you a lot of money—in the short and possibly long term.
Ask yourself: “Does my monthly budget allow for payment fluctuations?”
Term vs amortization
Amortization is how long it will take you to pay back your full mortgage (the original borrowed amount plus interest). In Canada, the maximum amortization period is 25 years.
Your mortgage term is the length of time your mortgage details (interest rate, payment amount) are in effect.. Shorter terms generally offer lower rates, but you'll have to renew earlier (when rates might be higher). The most common term is five years, but, depending on your mortgage, you can go as short as six months or as long as 10 years.
Ask yourself: “How long will I be staying in this home and what are rates expected to do in the next few years?”
The difference between closed and open term mortgages
With a closed mortgage, it's difficult (and expensive) to pay off your mortgage early or switch lenders before your term is up—but you will receive a better rate for your commitment.
With an open mortgage, your rate is usually higher but you can make extra payments, pay off your mortgage entirely, or switch lenders at any time.
Ask yourself: “I can commit to my mortgage contract for the full term?”
Mortgage renewal scenarios
The following examples show how mortgage renewal decisions can be different for everyone, depending on their current situation.
Scenario one: Retiree Sally purchases her dream condo
Four years ago, Sally purchased a two-bedroom condo and has no plans to move in the foreseeable future. Last year, Sally retired from her job as a teacher, so she now earns a pension and is watching her expenses. Her mortgage is coming up for renewal, and her goal is to live within her means with no surprises.
In this scenario, Sally would likely consider a closed, fixed-term mortgage. The fixed interest rate will give her a consistent mortgage payment, and since she’s not planning to pay down her mortgage sooner or sell, a closed mortgage may give her a lower interest rate.
Scenario two: Jessica and Steve are growing their family and building a new house
Jessica and Steve have been married for seven years ago and are expecting their second child. The small home they purchased five years ago is not large enough for their growing family, so they’ve decided to build a larger house. Now, their original mortgage has come for renewal, but their new house is still two months away from being complete.
Jessica and Steve may opt for an open mortgage renewal, at either a fixed or variable rate for the two months until their new house is complete. That way, when they sell their current home and payoff the mortgage, there will be no prepayment penalty.
Addressing your current situation and future goals will help you decide the terms of your mortgage renewal. There’s always room for flexibility as your life changes, and the advice of the experts at ATB can help you find a mortgage renewal that works for you.