Is now the time to renegotiate your cottage mortgage?

Have you heard about “Frugal February”? This social media trend encourages people to tackle all aspects of their finances throughout the month, no matter how small or big. For some, those goals are very big indeed, including renegotiating their mortgage.

Taking a long look at your mortgage is something that Ottawa mortgage broker Jacquie Bushell highly recommends, even if you don’t change anything. Having a robust discussion about your various options will leave you better informed and more confident about your finances (and no more feeling anxious when your nosy neighbour or pushy uncle says “Ya know what you should do with the cottage…”).

In the present economic climate, Bushell says, for the most part: “I’m in the camp of staying put… Rates are a little higher than what most people expect and nowhere near the sub-3 per cent mark. If there is no need to touch your mortgage, then don’t, and avoid a potentially higher rate than you currently have.”

Expenses are something that Ottawa and Toronto real estate lawyer Sabrina Ding wants clients to know about, noting that renegotiation often comes with costs. “Find out the penalty for ending your previous mortgage,” she says. “For example, if ‘Susan’ has a mortgage for $500,000 with a term of five years, and she decides to end her mortgage after only one year, then her interest penalty may be as high as $20,000 to $30,000. In contrast, if Susan can get a new mortgage with the same bank, then the bank will likely waive all interest penalties.”

However, Bushell notes that there are circumstances which make mortgage renegotiation a smart move these days, even when you take penalties into account: “If you are in an adjustable or variable rate mortgage and having troubles managing the increases, whether that’s financially or emotionally, you may want to consider converting to a fixed rate.” Ding echoes this sentiment, saying “A fixed rate means you get stability.”

Finally, Bushell points out that there might be special circumstances which warrant renegotiating your existing mortgage, including if you need to take out equity for debt repayment, renovations, or to build an emergency fund.“If you’re carrying large balances on your credit cards and/or lines of credit, you may want to exercise this option,” she says.

Before you make your final decision, make sure you understand the title requirements. Ding points out that the bank may require other family members to go on your cottage’s title for increased security if you have insufficient income. While it’s tempting to accept mom or dad’s nominal help, know that it comes with consequences. “If dad already has a property under his name, then going on the title to this second property means that he must pay expensive capital gains tax when this second property is sold,” says Ding.

If you do decide to renegotiate your mortgage, you’ll have to do pretty much all the things you did when you first signed—providing proof of income and employment and gathering and organizing lots of documents. The current value of your home will have to be verified, which usually involves the bank or a mortgage broker sending an inspector to your property for a brief visit. If you did major investments that aren’t visible (say, revamping a sewage system), you might have to provide documents to support that. Finally, you’ll need to prove that you have adequate insurance for the new assessed value of your property—because maybe the $1 million in coverage you had before no longer cuts it.

In short, mortgage renegotiation is a good move for some cottage owners but unnecessary for others. However, everyone should know the rules, understand their options, and talk through their choices with a trusted professional.