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Does renewing your mortgage early save you money?

April 25, 2022
5 mins
A professional woman working from home takes notes from her laptop screen

This article has been updated from a previous version.

Earlier this month, the Bank of Canada raised its key lending rate from 0.50% to 1%. And rates are only expected to keep increasing as the Bank strives to curb high inflation and excess domestic demand in Canada.

With that may come the highest mortgage rates we’ve seen since the start of the pandemic in March of 2020, when the Bank’s overnight interest rate sat at 1.25%.

Now might be the right time for an early mortgage renewal for those facing an uphill battle with their variable mortgage rate in the coming months.

How the pandemic may affect a renewal

As the pandemic was taking hold of the economy, a rush of homeowners inundated lenders with requests for mortgage payment deferrals, which led to delays for other services, such as mortgage renewals. Fortunately, things have normalized since then, and processing times are back to where they were pre-pandemic.

When your mortgage comes up for renewal, your lender doesn’t always re-verify your employment situation. However, if you’re looking to get an early renewal from your current financial institution or a new lender, it will be harder to qualify if your pay was cut or if you’ve since become unemployed. There can be more to consider when refinancing your mortgage during the ongoing COVID-19 crisis.

Save money by renewing your mortgage early

Under normal circumstances, deciding whether to renew your mortgage early will depend on the type of mortgage you have and the penalties of breaking your mortgage.

Borrowers who got a variable-rate mortgage before the Bank of Canada’s drastic rate increases earlier this year, for example, may be considering switching to a fixed-rate mortgage to lock in their rate before it rises further.

Those with a fixed-rate mortgage may feel a little more comfortable with the recent rate hikes. Yields on Government of Canada five-year bonds — which are the basis for fixed-rate mortgage pricing — have gone up recently and are likely to increase further by the end of 2022. A number of fixed mortgage terms still have rates below 4%.

If you opted for a variable-rate mortgage while rates were low during the peak of the pandemic, you might want to consider an early renewal to secure your current rate before they increase further.

Switching to another lender means you’ll have to pay a prepayment penalty and administrative fees. If you have a variable rate, you’ll typically pay three months of interest in penalties. If you have a fixed rate, you can expect to pay either three months’ interest or the interest rate differential (IRD), whichever is higher.

The IRD considers your mortgage rate, your lender’s current rate, and the remaining months left in your term. To calculate your potential penalty, your best bet is to enlist the help of a mortgage penalty calculator and mortgage payment calculator. This will help you determine how much you could potentially save if you switch to a lower rate or secure your current one.

Renewing with your current lender may allow you to break your mortgage without paying the penalty by offering what’s called a blended mortgage. This will give you a rate somewhere in between what you have now and what your lender is currently offering. There may be some administrative fees, but it would likely still cost far less than breaking your mortgage.

The stress test factor

The mortgage stress test was introduced more than four years ago to ensure borrowers can afford to make their mortgage payments if interest rates spike. Previously, the test was only for those making a down payment of less than 20%.

The stress test is based on a minimum qualifying rate, which is either the Bank of Canada’s five-year benchmark rate (currently 5.25%), or the borrower’s contract rate plus two percentage points, whichever is greater.

If you qualified for a mortgage before the rule changes and didn’t have to undergo the stress test, this will be new for you. It may also mean you’re unable to move your mortgage to another financial institution if you want to renew early.

Check out all your options

Typically, mortgage lenders will offer you the chance to renew your mortgage two to four months before your term ends without having to pay a prepayment charge. And many borrowers will blindly accept the offer without comparing mortgage rates first.

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Compare Mortgage Rates

Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.

Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.

While renewing with your existing lender may help you avoid the hassle of getting all the paperwork required by a new lender, or finding a lawyer, you could be leaving significant savings on the table by not considering switching lenders to get a lower rate.

For example, if you have a $250,000 balance on your fixed-rate mortgage with 20 years to go, a 2.69% interest rate, and a monthly payment of $1,346, you’ll pay $30,186.90 in interest over five years. If you’re able to get a rate of 2.09%, your mortgage payment will be $1,274 a month, and you’ll only pay $23,342.55 in interest over the same period. That’s a difference of nearly $7,000 in interest. But remember to factor in any prepayment penalties for breaking your mortgage early, as well as additional administration fees.

The Canada Mortgage and Housing Corporation’s 2021 Mortgage Consumer Survey found that the main reason why 30% of buyers switch or stay with their lender is to get a better rate.

Shopping around is one of the best ways to find a lower rate. That’s why many people choose to use a mortgage broker who can guide them through the process. According to the survey, 85% of respondents used a broker because they were looking for the best rate.

Finding the best mortgage rate in Canada is easy when using RATESDOTCA, where you can easily compare brokers, banks, credit unions and other lenders.

Craig Sebastiano

Craig Sebastiano is an award-winning writer and editor with more than a decade of experience in journalism, marketing, and communications. He’s written about a number of financial topics, including investing, real estate, robo-advisors, mortgages, credit cards, pensions, taxes, insurance, RRSPs, and TFSAs. Craig’s work has appeared in MoneySense, Morningstar, Benefits Canada, Advisor’s Edge, Job Postings, and Ryerson University Magazine. He has completed the Canadian Securities Course and is an avid do-it-yourself investor.

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