Should You Renew Your Mortgage Early?

Mortgages in Canada are commonly issued on five-year fixed terms. When that term ends, you’ll need to renew. However, staying “on the ball” often means looking at your options long before that maturity date hits.

In this guide, we’ll break down the pros and cons of early mortgage renewals and, more importantly, how to tell if you are the ideal candidate to break your term or if you should hold onto your current rate until the very last second.

What Exactly is an “Early” Renewal?

It’s important to clarify the terminology because it affects your bottom line. There are two main ways to look at this:

1. Early Execution: You have a new mortgage (and a new interest rate) take effect before the maturity date of your existing one.
2. Early Rate Locking: You secure a rate with a lender today, but the mortgage doesn’t actually “start” until your current term expires. This protects you if rates rise in the meantime.

The “Rate Inverse” Strategy: When to Move Fast

Whether you should renew early is almost entirely dictated by the current interest rate environment.

• The Incentive to Wait: If you currently have a “rock-bottom” rate (like the 1.5% or 2% rates seen in 2020-2021) and current renewal rates are higher (e.g., 4% or 5%), you want to hold onto that low rate until the very last minute. Do not renew early in this case; every month you wait saves you money.
• The Incentive to Jump: If you are currently in a high-rate environment (e.g., 6%) and market rates have fallen to 4%, the inverse is true. You want to close that renewal and get it funded as soon as possible to get out of the high interest and start saving on your monthly payments immediately.

Tip from Alex: “I always ask my clients: What is your plan for the next five years? If you plan to sell in two years, you don’t want to lock into a 5-year fixed term – especially with a big bank where the penalties are higher. We might look at a variable rate or a short-term 2-year fixed instead.”

Pros of Early Mortgage Renewals

• Lock in lower rates: Secure a better rate if the market has dropped since you first signed.
• Debt Consolidation: If you are carrying high-interest debt (like credit cards at 20%), it may be worth paying a mortgage penalty to roll that debt into a 4% or 5% mortgage. The cash flow improvement often outweighs the cost of the penalty.
• Future-Proofing: Switch your mortgage type (e.g., moving from Fixed to Variable) to accommodate a planned home sale or major life change.
• Rate Protection: Using a broker allows you to lock in rates up to 4 months prior to renewal, protecting you from mid-year spikes.

Cons of Early Mortgage Renewals

• The Penalty: Unless you are in an “Open” mortgage (which usually has much higher rates to begin with), there is always a cost to closing a mortgage early.
• Higher Payments: If you move out of a legacy low rate too early, you are essentially volunteering to pay more interest sooner than necessary.

How The Renewal Penalty Is Calculated

Lenders have no financial incentive to let you out of a contract early; they want their interest. An early renewal involves breaking your current contract, which typically triggers a penalty.

• Variable Rate Penalty: Usually a straightforward 3 months of interest.
• Fixed Rate Penalty: Usually the greater of 3 months of interest or the Interest Rate Differential (IRD).

The Bank vs. Monoline Difference

There is a massive difference in how penalties are calculated. Banks use “Posted Rates” which are significantly higher than the rate you actually receive. They offer you a “discount” off the posted rate, but if you break your mortgage, they use that spread to calculate a higher penalty, sometimes as high as 4% of your balance.

Monoline lenders (lenders who only do mortgages) use the rate you actually receive for their calculations, often resulting in penalties closer to 1%.

Timing Your Decision

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, contact them immediately.

However, if you want to take advantage of market drops or lock in a rate before they rise, you should make a decision at least 30 to 120 days before your renewal date.

Ready to see if an early renewal makes sense for you? Click here to work with Alex. Get a custom look at your numbers and find out if you’re a good candidate.

Early Mortgage Renewal FAQ