How To Switch Mortgage Lenders And What It Costs: Step-by-Step Guide
When it’s time to renew your mortgage, you can either stick with your current lender or switch mortgage provider. Switching can be beneficial if a lower interest rate is available, potentially saving you money. However, moving to a different lender involves some work and may come with extra fees. Make sure to compare your options carefully before deciding on the best path forward.
Why You Might Consider Switching Mortgage Lenders
People often change mortgage lenders when their current loan no longer meets their needs. You might think about switching if you want to:
- Look for a lender that better meets your needs. If you’re unhappy with the service from your current lender, switching gives you the chance to move your mortgage to a new provider with different terms.
- Get a lower interest rate. If another lender offers a reduced rate, switching could help you save money. A lower rate usually means smaller monthly payments on your mortgage.
- Obtain better terms and conditions. Each lender has different offers in their mortgage agreements. You might decide to switch if another lender provides terms that suit your needs better than your current lender. For instance, if you want more flexible repayment options to pay off your mortgage sooner, moving to a lender who offers this could be a smart choice.
When switching lenders, you might have the option to adjust your amortization period, depending on the new lender’s rules and the type of transfer. Some homeowners choose to extend their amortization to reduce their monthly payments. To qualify for a new amortization plan, you’ll generally need at least 20% equity in your home.
How Much Does it Cost to Switch Mortgage Lenders At Renewal?
While switching mortgage lenders can help save money, there are fees to consider. Some of the costs involved in changing lenders include:
Mortgage Discharge Fee
When you switch lenders, you’ll probably have to pay a fee to your current lender to release you from your mortgage agreement. These discharge fees usually range from $300 to $400, depending on your lender and location. The fee amount should be listed in your mortgage contract, but if it’s not, reach out to your lender for details.
Appraisal Fee
When you first took out your mortgage, your home was likely appraised. If you’re switching lenders, you might need another appraisal. Lenders usually require an appraisal to ensure that the loan amount is not higher than the home’s value.
The cost of a home appraisal is usually around $500, but it can vary depending on the appraiser, where your home is located, and the type of property you have.
Assignment Fee
To switch your mortgage to a new lender, you’ll pay an assignment fee to your current lender to handle the transfer. This fee can vary, but it’s generally between $300 and $400. It’s a small investment that can open the door to better rates and terms with a new provider—making it worth considering!
Title Company Fees
In transfer transactions, a title company handles the closing process. In Canada, the two main title companies are FNF® and FCT®. The choice of title company is usually made by your lender to complete the transfer.
A title company typically charges between $800 and $1200 to complete a transfer transaction. Sometimes, depending on the agreement, the lender might cover this fee for the transfer.
Advantages and Disadvantages of Switching Mortgage Lenders
Changing mortgage lenders can offer great advantages, but it also comes with some potential downsides. Here’s a look at the benefits and possible challenges you might face when making the switch:
Pros | Cons |
A new interest rate could help reduce your monthly mortgage payments. | Changing lenders comes with several costs. |
A new lender might offer you more flexible options for making extra payments on your mortgage. | The fees you pay might end up being higher than the savings you get from a lower interest rate. |
You can switch to a lender that offers services that are a better fit for your needs. | Switching lenders requires more work than simply renewing with your current provider. |
How To Switch Mortgage Lenders
Switching mortgage lenders is much like applying for a mortgage when you first bought your home.
- Explore different mortgage lenders. Start checking out lender options at least 4 months before your mortgage renewal. This gives you enough time to compare different deals. You can either do the research on your own or get help from a mortgage broker.
- Compare rates and terms from different lenders. It’s a good idea to get preapproved by several lenders and check their offers. Some might even cover part or all of the fees for switching your mortgage. A broker can make this process easier by doing the legwork for you.
- Complete your mortgage application. Collect all the necessary documents and apply to your chosen lender. You’ll need to provide proof of homeownership and a copy of your renewal letter from your current lender. If you’re using a broker, like Superb Mortgages, they’ll help you navigate the application process.
- Accept the new offer. If your mortgage application is approved and you’re happy with the terms, you can accept the offer. After signing the agreement, you’re ready to move forward with transferring your mortgage.
- Get a payout statement. The title company handling your mortgage transfer will ask your current lender for a payout statement. This document shows the total amount you owe on your mortgage as of the closing date with your new lender. It will then be sent to your new lender to finalize the closing details with the exact amount.
- Sign the documents and settle any fees. A signing officer from the title company will be there to witness you signing the final paperwork before the closing. If there are any fees to pay, they’ll be collected at this stage.
- Start paying your new mortgage. Once your new lender pays off your existing mortgage, they’ll provide you with a new one. From there, you’ll begin making payments on your new mortgage.
What to Keep in Mind When Changing Lenders
Switching lenders can be fairly simple when you transfer during your mortgage renewal with a standard charge. However, certain situations may cause complications, such as:
Changing Lenders Mid-Mortgage Term
Switching lenders before your mortgage term ends is seen as breaking your contract, which means you’ll face a penalty. In addition to other fees, you’ll need to pay a prepayment penalty. The exact amount of this penalty will depend on your lender and the type of mortgage you have.
For a variable-rate mortgage, the prepayment penalty is usually the equivalent of three months’ interest. For a fixed-rate mortgage, the penalty will be either three months’ interest or the interest rate differential (IRD), depending on which one is higher.
Collateral Transfers
The main difference between a standard and a collateral charge mortgage is that a collateral charge is registered for a higher amount, allowing you to borrow more in the future. Because this type of mortgage can secure other debts, like credit cards and car loans, switching to a new lender may require additional steps and come with extra fees.
A collateral transfer means moving from a collateral charge mortgage to a standard mortgage with a new lender. This process involves clearing any extra debts linked to the collateral charge.
Other Options Besides Changing Mortgage Lenders
Changing lenders isn’t the only way to secure a better interest rate or mortgage terms. You could also explore:
- Renewing your mortgage ahead of schedule. Some lenders let you renew your mortgage 4 to 6 months before your official renewal date. If interest rates drop during this time, you can take advantage of the lower rate by renewing early.
- Negotiating with your current lender. If your credit score has gone up since you first got your mortgage, you might be able to negotiate a lower interest rate when it’s time to renew. To strengthen your position, it can help to gather offers from other lenders.
- Refinancing your mortgage. Refinancing lets you take out a new mortgage with updated rates, terms, and amortization, whether you stay with your current lender or switch to a new one. It also allows you to tap into your home’s equity to pay off high-interest debt or fund major home improvements. Keep in mind that refinancing before your term ends means breaking your current contract, which may lead to extra fees. However, refinancing at renewal time can help you avoid or reduce some of these costs.
Final Word
Changing mortgage lenders can give you a better interest rate and terms that fit your needs. But it’s important to make sure the savings are worth the costs involved. Switching mid-term can lead to penalties and other fees. Don’t forget, that you can also consider renewing early or negotiating a new rate with your current lender.