Interest rates, instalment amounts, payment frequency . . . Mortgages come with many conditions. You can renegotiate them at the end of your term, which is typically between six months and five years. However, for a variety of reasons, you may want to renew your mortgage sooner.

Reasons to renew your mortgage early

There are many reasons why borrowers renew their mortgages before their term is up.

Lower interest rates

Lower interest rates are one of the main reasons that borrowers renew their mortgages early. After all, your interest rate directly determines the amount of your instalments: a lower interest rate means smaller payments.

For example, let’s say a couple has a mortgage balance of $400,000 and a remaining amortization period of 20 years. A 1 percent decrease would save them more than $10,000 over five years. With that extra money in their pockets, they could take a vacation, renovate their bathroom, or pay off their debts.

Changing family circumstances

Sometimes, changes in your personal or professional life require you to move. This means selling your home and buying a new one. In this situation, you need to calculate whether it would be better to transfer your current mortgage to your new home (if possible) or pay off your mortgage, pay the penalty, and get a new mortgage. A mortgage broker can help you make this decision.

A divorce or separation also warrants a new mortgage. If you’re keeping the house, your ex probably won’t want to have their name on the mortgage. That said, your financial institution has the right to refuse to renew your mortgage if your sole annual income isn’t sufficient to cover the payments.

You may have to sell your home if you can no longer afford your payments, whether due to a loss of employment or a serious illness that significantly lowers your income. In this case, you would have to pay off your mortgage in full and pay the penalty with the profit from its sale.

You may also want to renew your mortgage early if you start a new relationship and your partner becomes a co-owner of your home.

The consequences of an early renewal

A new mortgage with a lower interest rate can certainly save you a lot of money. But, after all is said and done, you might not come out on top.

Incurring a penalty

All financial institutions require you to pay a penalty if you end your mortgage early. This amount is used to compensate your bank for losses incurred.

Your financial institution may use either of the following methods to determine the amount of the penalty:

  • An amount equal to three months’ interest. This method is often used for variable-rate mortgages.
  • The interest rate differential (IRD). With this method, your lender estimates the loss of interest income for the remainder of the term. The rates used to make this calculation vary from lender to lender.

If your lender uses the IRD, your penalty could be several thousand dollars, especially if the end of your term is still a few years away or if interest rates have dropped significantly since you signed your mortgage.

Reimbursing “gifts”

Did your bank give you a cash bonus when you signed your mortgage? Did they pay your notary fees? You’ll be required to repay some or all of these “gifts” in addition to paying the penalty. Some lenders also charge a general administration fee.

Notary fees

If you take out a new mortgage, you’ll probably have to pay notary fees, which usually amount to several hundred dollars. The notary will need to discharge your old mortgage and then draft a new one.

However, some financial institutions will cover all or part of these legal fees for their new clients.

Qualifying

Before you commit to a new lender, you’ll need to qualify, just as you did with your previous bank. During this process, your credit report will be reviewed. If your situation has changed for the worse (decrease in income, additional debt, drop in credit score, etc.), your application may be denied. If this happens, you’ll probably have to stay with your current financial institution.

In addition, mortgage qualification rules have tightened in recent years. You may have qualified for your original mortgage under the rules that were in place at the time, but no longer qualify under the new rules.

Two strategies to minimize the consequences of an early renewal

Before you renew your mortgage early, keep in mind that there are several strategies that can help you reduce the penalty and fees.

Prepayment

First, try to pay off a portion of your mortgage early. Many financial institutions allow their clients to pay up to 15, 20, or even 25 percent of their mortgage per calendar year with no penalties. This repayment amount is not cumulative.

If the anniversary date of your mortgage is coming up, make a payment the month before and another the month after. This will double the amount of your repayment, which will further reduce the penalty amount.

Transfer your mortgage

Moving? Before you break your mortgage, ask your lender if you can transfer your mortgage to your new home. You’ll be subject to the same conditions but won’t have to pay a penalty.

Do the math

Whatever your reasons for breaking your mortgage, do your homework before taking out a new loan. Calculate the penalty amount and check with your current financial institution to see if you’ll be incurring any other fees. Only then will you be able to make an informed decision. Don’t forget that your Multi-Prêts broker is here to help!

Key takeaways

  • A divorce, loss of employment, or lower interest rate may prompt you to renew your mortgage early.
  • Sometimes the penalties and fees for breaking your mortgage early are greater than what you might save with a new mortgage at a lower interest rate.
  • Some financial institutions will let you transfer your mortgage, so you don’t have to pay a penalty. However, that means you keep your old interest rate.
  • Contact your Multi-Prêts broker to renew your mortgage.