An average five-year fixed term is usually the best option. You're able to lock in your interest rate for this length of time, meaning you know exactly what your payments will be for those five years, and you are not subject to any unexpected spikes in interest rates. However, this also means that depending on the terms of the contract from your lender, you may be also locked into your home for those five years. If you terminate the contract early, fees can apply. Your lender may have a clause written in where your fees are significantly reduced after, say, three years, but you’ll need to review your paperwork to be sure.
When your five years (or whatever term you have with your lender) are nearing expiration, you should receive a renewal notice approximately 21 days in advance. Prior to this, however, you’ll need to decide if you'll simply renew your mortgage as is or if you'll be looking to negotiate your next term at a better rate with another lender.
If you're happy with your lender and wish to renew, you can go ahead and simply wait for your renewal notice to arrive. If you prefer to move to a new lender, begin shopping around a couple of months in advance so that by the time you need to start a new term, you have all of the information you need to make a timely decision. In both cases, there are a few things you can do to negotiate your way into better terms moving forward.
Are you in good standing with your current lender? If you haven't missed any payments and your overall credit rating is good, lenders are easier to work with and the cards are generally in your hands. Even if your interest rate was phenomenal in your current term (interest rates have been at historic lows for several years now) there is still opportunity to negotiate your new rate.
Not many of us are in a situation anymore where your interest rate is significantly higher than the current lending rates, but if this is your situation, you may consider looking into renegotiating your rate early. Even if you're only three years into a five-year term, the costs to break your term early may be less than the interest you’d pay otherwise. Review your situation and speak to your lender often to ensure you are maximizing the benefit for your money.
Another option is to change the frequency of your payments. Are you currently paying monthly? Even changing that frequency to bi-weekly can shave thousands of interest off your overall mortgage repayment. Change it to weekly and you’re now shaving years off your repayment. Who wouldn’t want to pay off their home years earlier?
If you initially put down a large down payment, you'll likely have a better advantage at negotiating. Even if you’re happy with your current lender and plan to renew, don’t be afraid to do your research on what other lenders may be offering, and use their offers to negotiate with your current lender. After all, your lender is a business and is accustomed to negotiating terms this way. Competition keeps the industry balanced and ensures you are not taken advantage of as a consumer.
Take control of your mortgage, keep yourself informed on new changes implemented by the Bank of Canada and the Canadian Mortgage and Housing Corporation, and take advantage of what your lender can do for you. The more you work with your lender as a partner, the more power you’ll have to put yourself in the best financial situation possible.