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Early Mortgage Renewal in Canada

Your guide to early mortgage renewal in Canada

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Written by Joel Kranc

About early mortgage renewal

If you are a homeowner with a mortgage, you already know that that loan comes with a fixed term called the mortgage term. When that term comes to an end you have a few options. You can pay off what’s left of your mortgage, or you can renew your term.

But what if economics or your personal situation has changed from the time you first acquired the home and mortgage? Interest rates may have changed, or you may want to change the length of your term from three years to five years. An early mortgage renewal is possible before your term officially ends. Generally, many lenders will charge a penalty if you decide to do an early mortgage renewal prior to the six months before the end of a term.

Each lender is different and so some banks allow you to renew your mortgage as early as 150 days before maturity. Pre-payment or other fees may be waived depending on the type of mortgage.

It’s important to make a distinction. Refinancing a mortgage is different than early renewal of a mortgage. Refinancing means renegotiating your existing mortgage loan agreement. You might do this to consolidate debts or to increase your loan for other large expenses.

Renewing a mortgage early would most likely be done because of a change in interest rates. When rates are dropping, you would benefit from a mortgage renewal as it decreases borrowing costs.

A change in your life, like divorce or leaving a job, could also be a time to evaluate your budget and look at mortgage costs before the term finishes.

However, as interest rates go up, it may be better to stay put and leave well enough alone. Renewing your mortgage early in that scenario could be costly and affect your monthly fixed expenses. Also, breaking a mortgage comes with costs and you must assess with your lender if the new rates outweigh any penalties you will pay for the breakage.

Benefits of early mortgage renewal

The benefits of early mortgage renewal are usually directly connected to the interest rates available at the time. If you’re worried about losing out on a rate that works for you or the trend of lowering rates you might want to lock in early to save money over the course of your mortgage.

Also, interest rates were low for many years leading up to the recent higher inflation figures. Many people taking mortgages got variable-rate mortgages. As interest rates have been steadily climbing, many people with variable mortgages may consider breaking that term and opting for a fixed-rate mortgage. The benefit? Early mortgage renewal will allow you to lock in a fixed rate before the Bank of Canada raises rates even further.

Questions you should you ask yourself before refinancing or renewing your mortgage

Major financial decisions should be made with as much information as possible. Asking yourself some questions before you refinance or renew your mortgage early is key to making the right decision for the long term.

Do you plan to make any renovations that will require funding?

Renovations need two things: time and money. If you require finances to fund a large project you may want to consider options such as lines of credit, loans or early mortgage renewal/refinancing. There may be penalties for renewal or refinancing so you’ll want to time out the decision so it’s as financially advantageous as possible.

Are you thinking of buying a second property?

There are many ways to finance the purchase of a second property. Typical mortgages may not always work for vacation homes or investment properties. Sometimes interest rates are higher on second homes, as well. Early mortgage renewal or refinancing can provide extra cash and allow you to make the purchase.

Has your financial situation changed?

Finances have a way of going in positive and negative directions. It’s hard to ascertain when either direction will occur. Before renewing your mortgage early, consider your budget, how much you can save (or lose) upon renewal, if your job is secure or even if you are moving and your mortgage needs have changed.

Would you like to pay off your mortgage?

The ability to pay off a mortgage early is a dream for many Canadians. Dropping the burden of debt will open other financial doors. Early mortgage renewal can help you make that happen if you are taking advantage of lower rates that allow you to pay off your mortgage faster. Consider the interest rate environment and the best course of action to save money and pay off debts early.

Mortgage renewal tips

When it comes to one of the largest investments you’ll ever make, don’t be too hasty with financial decisions. Here are some tips on early mortgage renewal.

  1. Know the difference between a fixed and variable mortgage term. Renewal is a chance to make changes and if one term works better than the other, now is the time to make that change.
  2. Decide as early as possible. The earlier you know what you want the better, that way you can take advantage of interest rate savings if the new rate is lower than your existing rate. You’ll also save on penalties if you do it in the allowable time frame.
  3. As rates have been on the rise, why not ask your lender about better rates. You might be able to negotiate a better rate prior to receiving the official renewable slip from your lender.
  4. Comparison shop. Use RATESDOTCA or a broker to help you compare the best rates. You can find out easier and faster if a renewal at a better rate is possible than simply shopping around on your own.

*Based on the difference between estimated deep-discount 5-year fixed rates from Canada's top six banks and the lowest comparable rates on RATESDOTCA, as of January 14, 2022.

Frequently asked questions about early mortgage renewals

All your questions about early mortgage renewal, answered.

What are my options at the end of my mortgage term?

Once your mortgage term ends you have several options regarding mortgage loans. You can simply renew with your current lender and try to negotiate a better rate or you can move to a new lender with the hopes of finding better interest rates.

Is a longer mortgage term always better?

Longer term mortgages work better for people who want to lower their monthly mortgage payments. Many people who have fluctuating income may find a longer amortization period eases the payment uncertainty. It also helps people with a very large mortgage or if you are buying your first home and need to reduce payments.

Will I be breaking my mortgage if I accept an early renewal offer?

It depends on your lender and what you’ve negotiated with them. However, generally an early mortgage renewal means breaking the current terms of your mortgage and could also mean penalties associated with it.

Is there a penalty for early mortgage renewal?

Penalties for early mortgage renewal are often calculated as three months’ interest at your current rate, or the interest rate differential (calculated using the current rate, the new rate, and the remaining months left in your mortgage term).

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