Mortgages in Canada are commonly issued on five-year fixed terms. When the term ends you will need to renew your mortgage. Sometimes you may want an early mortgage renewal. In this post I’ll break down the pros and cons of renewing your mortgage early so you know what your best options are.
The Early Mortgage Renewal Process:
There are four main courses of action when it comes to renewing your mortgage:
- Renew with your existing lender
- Switch to a new lender
- Refinance to take out some equity / add or take people off the title
- Pay off the mortgage in full / sell
When you’re ready to renew your mortgage, either early or at the end of your term, always reach out to a mortgage broker to request a free quote on what rates are available. They have access to a wide array of lenders and can also help you evaluate the different types of mortgages to determine what’s best for you.
Typically your current lender will send you a mortgage renewal notice at least 21 days before the term is up. If you have not received a notice then you should contact your lender immediately.
However, if you are on the ball and want to take advantage of the benefits of mortgage renewals you should make a decision at least 30 days before your renewal date. Some lenders may allow you to renew your mortgage early within 180 days prior to your renewal date without a penalty.
Pros of Early Mortgage Renewals:
As long as you have made all your mortgage payments on time, there can be a variety of positives available to you by renewing your mortgage early. However, it’s important to note that a lot of these depend on what your current mortgage looks like, and where interest rates are at comparatively.
- Lock in at a lower interest rate
- Switch the type of mortgage you have to accommodate future plans (like selling)
- Refinancing to obtain equity / add or take people off the title
- Sell your property or pay off your mortgage in full without a penalty (note: if you’re renewing your mortgage early you may incur penalties, depending on your current loan)
- Switch lenders to access better rates
- If you use a broker typically you can lock in rates 4 months prior to your renewal date so if rates increase you’ll be protected.
Cons Of Early Mortgage Renewals:
Renewing your mortgage early does come with some negative consequences. However, these depend on your current mortgage type, market conditions, and the lender you’re with. Ensure that you talk to your broker to know exactly what the cons of an early renewal are for you.
Some examples of cons would be:
- Paying a penalty to break your current mortgage (you can sometimes get this penalty paid for if you use a broker to switch lenders)
- Renewing at a high interest rate
- Renewing and having higher monthly payments
How The Renewal Penalty Is Calculated
An early renewal may come with a penalty for breaking your mortgage prior to the maturity. This penalty is usually 3 months of interest at your current rate, or an interest rate differential.
It is important to note that there is a significant difference between how a bank will calculate this compared to a monoline lender. The calculation itself is a complex one with values that can change daily as it encompasses the remaining time in the mortgage term, the current market rates, and the outstanding balance.
Typically, when you break a mortgage with a monoline lender you will incur a penalty of around 1% of the outstanding balance where with a bank it could be as high as 4%.
The reason for this is due to the way the interest rate differential is calculated through the “posted” rate. The banks have a posted rate that is significantly higher than the rate you will receive for a mortgage, however with a monoline lender the posted rate is the same as the one you receive. With a bank they offer you a “discount” off the posted rate so if you break your mortgage you need to cover the spread
Early Mortgage Renewal FAQ:
What’s the early mortgage renewal process?
First contact your mortgage broker and get your free quote to find the available rates. Then choose the type of mortgage that best fits your needs. Lastly you will broker will take you through the final steps of approval and obtain any documents necessary.
Can you pay off your mortgage at renewal?
Yes, if you’re looking to sell your property or pay off your mortgage in full you can do so on the maturity date without a penalty. If you need a short extension past the maturity date then you must inform your lender that you want to go into an open-rate mortgage product. This will allow you to sell or pay off in full without a penalty.
Do mortgage brokers help you renew your mortgage early?
Yes, mortgage brokers can help you renew your mortgage early, and give you a free quote from multiple lenders. That way you can choose the best path forward to renew your mortgage early.