What does it mean to renew your mortgage early?
When you get a mortgage to buy a property, your loan has a fixed term. This is called a mortgage term. When your term ends, you must renew your mortgage, or pay off what's left of it.
A pre-term mortgage renewal occurs when you choose to renew your loan before your current term officially ends. By that time, the prevailing interest rates (what it costs to borrow) may have changed. When renewing, you can also choose to change the length of your new term. For example, 3 years instead of 5.
To simulate borrowing scenarios, use our mortgage payment calculator.
Be careful of penalties!
Most lenders will let you renew your mortgage up to 6 months before it expires, penalty-free.
Before this 6-month period, certain fees may apply. That’s why it’s important to make your calculations before deciding. Compare the difference between the penalty and the interest savings that the new mortgage rate could provide.
In general, the later the mortgage maturity date, the higher the penalty.
What is mortgage refinancing?
Mortgage refinancing allows you to renegotiate more terms and conditions than a pre-term renewal. For example, a refinance would allow you to renegotiate the amortization period of your loan to reduce your payments.
It also allows you to renegotiate your loan amount and access a portion of the net worth of your home (the difference between its current market value and the remaining balance on your mortgage). For example: This allows you access the necessary funds for renovations, consolidating debts, or investing while benefiting from a better interest rate.
However, you should note that refinancing your mortgage may incur penalties, such as prepayment fees. In effect, this is a new loan application.
Some additional fees may also apply, such as a property value assessment.
It can be confusing to navigate all the mortgage vocabulary that’s out there. Luckily, we have the perfect guide for you with our article “Mortgage lexicon: the vocabulary you need to know to buy a home.”
Why should you renew your mortgage early?
The main reason? A change in interest rates
Early mortgage renewal can be advantageous when interest rates drop. When you renegotiate your mortgage, you benefit from a new rate as soon as you make your payment after signing your renewal.
If your new rate is lower than your previous one, your mortgage payments will decrease. The same will be true for your cost of borrowing until the end of your mortgage term.
An interest rate decrease — due to a decrease in the policy interest rate from the Bank of Canada — is often one of the main reasons for an early renewal.
Before an upcoming interest rate increase
An early mortgage renewal can also be an attractive option before a rate increase occurs because you could renew and secure a lower rate.
Good to know: The key interest rate can be adjusted eight times a year on predetermined dates.
A change in your personal or family situation
Adding or removing a person to your mortgage could also justify renegotiating your mortgage early. This represents a refinancing rather than an early renewal, as a credit report evaluation will be required.
If you sell your home, you can transfer your mortgage (partially or in full) to buy a new property. It may also allow you to reduce the cost of breaking the terms of your mortgage before maturity.
What questions should you ask yourself before refinancing or renewing your mortgage?
Let's say your mortgage is amortized over 25 years (the time it takes to pay it off) with a 5-year term. You’ll have the opportunity to discuss your needs and make changes to your mortgage solution only four times at no cost. You can apply the changes when your mortgage is scheduled for renewal. An early renewal represents an additional opportunity to modify your mortgage and adapt it to your needs.
To properly evaluate your options before renewing, here are some things to think about:
- Are you planning to move soon and sell your current property?
- Do you plan to undertake renovations that will require funding?
- Are you thinking of buying a second property?
- Have your financial goals changed?
- Has your financial situation changed in recent years?
- Would you like to pay off your mortgage faster?
The renewal of your mortgage can be a key factor when it comes to managing your personal finances. For example, mortgage rates and payment frequency can have an impact on your budget. Take the time to think about your situation and speak to our specialists to choose an option that suits you.
Should you get a home equity line of credit?
Renewing your mortgage is a good chance to consider if you need a home equity line of credit.
How it works: a portion of the principal paid on your property's mortgage is used to free up a borrowing limit on a line of credit secured by the value of your property. This financing is then immediately available.
This is a simple and beneficial way to finance a project such as renovations or purchasing a second property. You can also think of the line of credit as an emergency fund.
Normally, a home equity line of credit works on the user-pay principle. Only when you start to use the available funds does interest start to accrue.
There are many good reasons to renew your mortgage early. Whether it's to adjust your mortgage to your family situation or to take advantage of beneficial interest rates, don't hesitate to contact our team of experts to discuss your options. We're here to help you achieve your goals and save money.