Early Renewal

The apprehension of another hike in the interest rates keeps the borrowers having a long-term mortgage worried as the renewal period of the loan approaches near. The worries become more pronounced especially when the interest rates are nerve racking just a year before the maturity of the long-term mortgages. And if the interest rates are at a low just a year before the maturity of the mortgage, but soar during the time of renewal, the borrowers fail to cash on the advantage of low rates. Generally, the renewal notices are sent to the borrowers just a fortnight before the maturity of the prevailing mortgages and in such a situation the borrowers are compelled to pay a rate that is available at the point of time when their mortgage is scheduled for renewal. Hence, in such situations the borrowers are left with no choice, but to rely on their luck.

The plights of the borrowers having long-term mortgages have compelled them to seek a way out from this ordeal. And the answer to their woes is the 'early renewal' program, which is considered to be a long-term mortgage version of 'convertibility'. In fact, it is essential for all borrowers shopping for long-term mortgages to include the 'early renewal' feature in their mortgage agreement. However, it is disheartening to note that this option is available only with a few mortgagees.

The 'early renewal' option offers a number of advantages to the borrowers having a long-term mortgage. Contrary to the normal procedure of renewing their credits at the fag end of the last year of their existing mortgages, the 'early renewal' plan enables the borrowers to recommence their mortgages any time during the last year of the loan term. As the early renewal option enables the borrowers to restart their long-term mortgages at any time during the last year of the term when the rates are at their lowest, much of the worries of the borrowers over the insecurities relating to the interest rates are done away with.

In the normal practice, it is the creditor who sends out a notice to the borrower regarding the renewal of the long-term loan around 15 days before the maturity of the loan term. However, in the early renewal procedure things are just the reverse and in this case the borrower takes the initiative to renew the mortgage at a time convenient to him or her during the last year of the mortgage's term. Although when they opt for the early renewal system, the borrowers are able to make substantial gains vis-à-vis the interest rates, they do have to pay a price for it too. In the normal renewal, a borrower is permitted to change the lender at the maturity of a mortgage term. But in the event of the early renewal option when the borrowers are renewing their mortgages before it is actually due, they have to continue with the same lender. This is similar to the provisions in the convertibility method. All these notwithstanding, the borrowers still prefer to adopt the early renewal as the gains from it are much more than the binding to stick with the same lender for the next term of the mortgage.

It must be noted here that apart from continuing with the same lender for the next term of the mortgage, the borrowers are required to pay another cost while accepting the early renewal option. In fact, by allowing the borrowers to go for an early renewal, the lenders demand that they are duly compensated by the mortgagors for breaking the commitment made at the beginning of the last term of the credit. And as a penalty or fine, the borrowers are required to pay a sum that is equal to the difference between the current and contractual interest rates on the unpaid principal amount for the remaining period of the existing term of the mortgage. This penalty is also known as the interest rate differential (IRD). In brief, the IRD is the cost to the borrower for enjoying the benefits of renewing the mortgage before it is due and this is also the gain of the lender for allowing the lender to opt for early renewal.

Here is something that the borrowers must always bear in mind. An early renewal is only possible when the borrower takes the initiative as the lender will never go for an early renewal option for it is a monetary loss to them. So, if you are a borrower have a long-term mortgage, it is your responsibility to start the ball rolling for an early renewal as this suits your interests best.

In the instance of a borrower including the early renewal option in the mortgage agreement, he or she should keenly observe the interest rates during the last year of their mortgage term. As the early renewal option enables the borrower to capitalize on the lowest interest rate during the last year of their existing mortgage term, he or she should make use of this advantage by asking the lender to go in for an early renewal when the rates are at the lowest and not just watch the interest rates fluctuate. In brief, the borrowers need to take the right initiative at the right time to extract maximum benefit from the early renewal option.

While shopping for mortgage, you will often find that there are several lenders who say that they offer the early renewal option, but do not agree to put the clause in the mortgage agreement. This is a highly dubious situation, as no borrower will feel secure regarding the interest rates unless this vital clause exists in black and white. Moreover, how can anyone trust a lender in this regard when the issue of early renewal would come up several years from signing the mortgage agreement? Hence, it is advisable that every borrower must be careful in protecting his or her interests. The borrower should insist that the lender includes the early renewal option clause in the mortgage deed. In the instance of some problems to do so, the borrower should ensure that it is mentioned in a secondary agreement or at least in an official note from the lender.

It must be noted here that contrary to the common concept, mortgages do not become eligible for routine renewal on their maturity. What happens in this case is just the reverse. Theoretically it is essential to repay a mortgage in full when it is due for a renewal. At the same time, it is also true that unless the renewal clause is specifically mentioned in the original mortgage agreement, mortgagees are not bound by the rules to recommence a mortgage when its term matures. However, there are many financial institutions which themselves offer to renew the mortgages of their favored customers on the maturity of their mortgage terms even though the agreement may not include the renewal clause. The early renewal option is basically a renewal clause where the lender agrees to renew a mortgage prior to its maturity provided the borrower takes the initiative in this regard. However, the most important aspect of the early renewal option is the fact that a mortgage can be renewed before its maturity, but essentially in the last year of the term.

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