Glenna from Edmonton asks: My mortgage term is coming up for renewal soon. Can I move to another bank with lower interest rates without requalifying? Also, the equity in my home is more than 20 per cent and I am wondering if the mortgage no longer needs to be insured.
Answer from Penelope Graham, head of content at Ratehub.ca:
Whether and how to change mortgage lenders when renewing is a common question. It's smart to shop around since you'll usually get a more competitive rate from a new lender than your current one.
That's because banks reserve the best pricing for new customers. However, the switching process can be confusing.
First, I'll clarify that no matter what, you will need to requalify for your mortgage when moving to a new lender. A switch requires a full new application and underwriting, where the lender will assess factors such as your income, existing equity in your mortgage and your credit score. In some cases, the new lender will send an appraiser to your home to determine its condition and see whether its market value aligns with the loan.
You'll also need to pay some legal and administrative fees to process the new mortgage, such as moving your title insurance, and its discharge from one lender to another. If you're working with a mortgage broker, they can guide you through the process.
In some instances, lenders offer cash bonuses for new clients, or cover any fees associated with the switch, so don't be afraid to ask.
It may sound like a headache, and one you could avoid by sticking with your original lender at renewal, but the savings from a lower rate can be well worth it.
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It's important to note that having to requalify for your mortgage at renewal time is different from being stress-tested again. The stress test is a qualification hurdle that requires first-time borrowers to prove they could make mortgage payments at a rate two percentage points higher than the one they actually receive from their lender.
The good news is borrowers switching from one federally regulated lender to another, or whose first mortgage started at one, are usually exempt from a new stress test.
Any changes to your mortgage's original amortization period and loan amount will classify your move as a refinance, and you'll be stress-tested. And if you currently have a collateral-charge mortgage - which bundles in a line of credit - you'll generally be stress-tested when switching.
The second part of your question actually reflects a common misconception among mortgage borrowers; they often ask whether it's possible to stop paying for mortgage default insurance once their home's equity exceeds 20 per cent. That insurance is required for home purchases priced under $1.5-million, where less than a 20-per-cent down payment was made.
The reality is that it's not an additional premium tacked onto your monthly payment that goes away once your insured borrower status changes. Instead, mortgage default insurance is applied to the mortgage one time - when the loan originates - and is a permanent addition to the principal loan amount. The total is combined into your mortgage and paid over its amortization.
However, while the amount the borrower pays for this insurance never changes, your mortgage can lose its insured status. This typically happens in a refinance, which requires that the mortgage become uninsured. And while smaller lenders tend to deal with only insured borrower business, a big bank may require you to take out an uninsured product if you've got more equity paid in your home.
Losing your mortgage insurance means also losing access to the most competitive interest rates. Insured mortgage rates tend to be the lowest, because they can be securitized by the lender - sold as mortgage-backed securities to investors - which allows them to offer a cheaper mortgage.
If getting the lowest rate is important to you, you should try to keep your mortgage's insured status as long as you can. Be sure to inquire about this when choosing a new lender, and be aware of how it may affect your payments if you do need to drop your insured status.