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how early can you renew your mortgage

Renewing your mortgage early

Everything you need to know about renewing your mortgage early

As interest rates hit record lows, many Canadians find themselves curious about the prospect of renewing their mortgages early. Can you renew your mortgage early? Keep reading to learn whether this is possible and how Alpine Credits can help Canadians looking to take advantage of low interest rates.

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how early can you renew your mortgage

How early can you renew your mortgage?

Most mortgage lenders in Canada will let you renew anytime within the term’s final 120 days. There are situations in which you’d want to renew your mortgage earlier, however.

For example, let’s say you secured a mortgage at the start of 2020 when the Bank of Canada’s key lending rate was 1.75%. Within a single month, that rate fell all the way to 0.25%. That 1.5% difference may translate into thousands of dollars in savings.

The major problem with renewing your mortgage early

Many homeowners mistakenly fail to account for one crucial thing when deciding whether to renew their mortgage early: penalties. These fees can range from less than $2,000 to $20,000 or more depending on your mortgage’s type, balance, and remaining term. They can easily offset any economic advantage you’d obtain by renewing your mortgage prematurely. Unless the interest rate you’re looking to capitalize is sufficiently lower than that of your current mortgage, you’ll end up essentially losing money.

Why these penalties exist

When you sign a mortgage contract, the lender subsequently expects a certain amount of interest. Penalties offset the financial damage associated with any action (including paying your mortgage in full early) that infringes on these expectations. Many homeowners signed their mortgages completely unaware of these stipulations, leading to surprises down the road.

How early renewal penalties are calculated

Early mortgage renewal penalties are typically calculated in one of two ways.

  1. Using the first method, lenders simply charge what you would have paid in interest at the original rate for three months.
  2. The second method – common with fixed-rate mortgages – involves calculating the interest rate differential. This is fairly complicated so most homeowners crunch the numbers with a mortgage broker to estimate the penalties, which can be substantial.

9 additional things to keep in mind when deciding whether to renew a mortgage early

Beyond penalties, there are a few things you should be aware of when deciding when to renew your mortgage.

1. Depending on your goals, there are likely better options

Often, Canadian homeowners renew their mortgages early in an effort to consolidate debt. If you fall into this category, there are likely better options, such as a home equity loan that can be used to consolidate debt. These loans are much easier to apply for than early mortgage renewals. Associated costs can also be substantially lower with a home equity loan since they’re completely separate from your first mortgage.

Home equity loans are useful in a wide range of situations, which you can read about here.

2. Your lender may be sending an early renewal offer anyway

Lenders recognize homeowners tend to shop around and consider early renewal options whenever interest rates drop substantially. They will often attempt to be proactive and minimize losses by sending early renewal offers. By accepting, you will avoid the penalties associated with breaking a mortgage early on your own. You should still shop around and compare their offer to those of other lenders, however just keep the possibility of an offer in mind and perhaps even consider contacting your lender to see what’s available.

3. Interest rates don’t fall like they used to

Previously, people generally advised against renewing a mortgage early unless the new rate was at least 2% lower. Of course, this hasn’t been a feasible rule of thumb for a while now considering rates are already so low. Even the drop from 1.75% to 0.25% in early 2020 falls outside of this range. Given this reality, it’s difficult to find situations in which a potential renewal rate is low enough to be overwhelmingly advantageous. Today, homeowners typically consider renewing early to consolidate debt or reduce their monthly payments. Again, there are often better options in regards to tapping your home equity for those purposes.

4. Don’t run away at the thought of penalties

While penalties can wreak havoc on your finances, that’s not to say you should put off the idea of renewing your mortgage early. It’s worth running the numbers to see whether you could actually save money in the long term with this decision. Even if you discover an early renewal’s costs far outweigh its benefits, it’ll be an eye-opening experience. You’ll know what to look for regarding early renewal terms in your next mortgage, which leads nicely to our next point.

5. Consider sticking with variable-rate loans

Variable-rate mortgages tend to feature much lower premature renewal penalties. Thus, this should generally factor into your decisions as you shop around. Consider variable rate loans, which offer more flexibility and can even typically be converted into fixed-rate mortgages at any time.

6. There are other costs associated with early mortgage renewal

While they may not constitute formal penalties, there are other costs to think about when renewing your mortgage early. You’re essentially applying for a brand new mortgage, which requires appraisals and inspections, among other things. It’s crucial that you factor these expenses into the equation, especially if the benefits of renewing early aren’t significant relative to the penalties. Additional costs could obliterate whatever financial advantage you expected.

7. Interest rates could always change again

Obviously, interest rates are not static. The Bank of Canada announces its rate decisions (whether to raise, lower, or hold) eight times annually. This year’s schedule is:

January 20 July 14
March 10 September 8
April 21 October 27
June 9 December 8

When renewing your mortgage early, it helps to gauge (with the help of an advisor) which direction interest rates are likely to move in the near future. It would be a shame to renew early only for rates to drop even further later on.

8. You may be subject to a revised stress test

If your last mortgage renewal took place years ago, chances are you’ll be subject to an entirely new stress test process upon attempting to refinance. Stricter rules may mean you don’t even qualify for rates anywhere near the record lows you’re likely anticipating. These rules won’t apply if you renew your mortgage with your current lender, which is another incentive to stick with them.

9. Review your renewal terms

In the process of deciding when to renew your mortgage, you’ll likely learn quite a bit about the stipulations associated with home loans. You can use that new information to make more confident decisions about your next mortgage. Review the document in full and ask the lender about anything that seems unclear, such as:

  • how interest compounds (semi-annually or monthly)
  • how the rate changes (assuming you choose a variable interest rate loan)
  • whether prepayments are allowed without penalty
  • how the early renewal penalty is calculated

Contact Alpine Credits for more information about borrowing from your home equity

At this point, you’ve likely realized the math often doesn’t add up on renewing your mortgage early.

Don’t worry, though, as mentioned earlier, there are options for unlocking many of the same benefits associated with early renewals, minus the costs and penalties.

Click here to read more about home equity loans and how they can help. An advisor from Alpine Credits will be happy to assist you and can guide you through the mortgage renewal process.

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Frequently asked questions

Mortgage lenders in Canada typically let you renegotiate your mortgage at any time within the 120 day period prior to its expiration. Outside this window, you’ll incur fees unless they make an offer.

Lenders typically won’t deny your mortgage renewal request unless you have a history of missed payments. This is true even if your financial situation has changed.

The penalty is typically either three months’ interest or a complex calculation known as the interest rate differential. Both methods are designed to compensate your lender for the lost expected interest.

You must do a stress test when renewing your mortgage with a different lender. If you stick with the same financial institution, no such requirement exists.

When interest rates fell drastically (i.e. more than 2%), the benefits of paying an early renewal penalty were quite clear. This isn’t the case anymore, however. Factors beyond the lower interest rate will typically be the deciding factor regarding worth.

Depending on your needs (i.e. debt consolidation), you can typically unlock those same benefits through a home equity loan instead.

Further reading