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Tapping into Lower Interest Rates: Does Renewing Your Mortgage Early Save You Money?

July 22, 2020
5 mins
A mortgage broker breaks down the paperwork a young couple with have to sign

Late last year, many had forecasted that the Bank of Canada might cut interest rates in 2020. However, no one could have foreseen just how low interest rates were about to plummet in the coming months.

Canada’s COVID-19 lockdown led to a sharp rise in unemployment, causing the Bank of Canada to slash its key lending rate from 1.75% to 0.25% in just the span of one month.

The silver lining for those still employed and with a mortgage is that mortgage rates have also fallen to historic lows—which means for some, it may be the right time for an early renewal.

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 once again, and processing times are back to where they were.

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 COVID-19 crisis.

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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.

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.

For borrowers who got a variable-rate mortgage before the Bank of Canada’s drastic rate cuts earlier this year, you’re likely happy that rates have dropped thanks to the significant interest savings, particularly if your rate was around prime – 1%, which now translates into a rate of 1.45%. And BoC Governor Tiff Macklem has even confirmed that rates will remain low “for a long time.”

For those with a fixed-rate mortgage, you’re likely not quite as happy. Yields on Government of Canada five-year bonds—which are the basis for fixed-rate mortgage pricing—have come down recently and are likely to remain low as well. A number of fixed mortgage terms now have rates below 2%.

If you locked into a substantially higher fixed rate prior to the pandemic, you might want to consider an early renewal to take advantage of today’s low rates.

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 takes into account 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.

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.

There’s always the potential that mortgage rates will continue to fall, and renewing now could mean you’ll miss out on lower rates in the future. However, there’s no sense in trying to perfectly time the market, since nobody—not even the experts—are able to do so.

The stress test factor

The mortgage stress test was introduced more than two 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 4.94%) 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 using rate comparison sites like this one to see if they can get a better rate elsewhere.

While renewing with your existing lender may help you avoid the hassle of getting all the paperwork required by a new lender, finding a lawyer, and 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 2019 Mortgage Consumer Survey found that the main reason why 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 easily do that shopping around for you. According to the survey, 67% of those renewing 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.

This post has been updated.

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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