Most Canadian homeowners renew their mortgage multiple times before they’ve fully paid it off. The exact timing of each renewal, though, will depend on the length of a given mortgage term, which can span from a few months to 5 years or longer.
You may have also heard that some people choose to renew their mortgage early. Maybe you’ve received an early renewal offer from your current lender. But what exactly is early mortgage renewal? And should you do it?
We’ll break down what early mortgage renewal means, how the process works, and the potential benefits and drawbacks of renewing early.
What Is Early Mortgage Renewal?
Technically speaking, your full mortgage balance comes due at the end of your term. That’s why it’s so common for homeowners to renew their contract multiple times.
Early mortgage renewal is simply the process of renewing your current mortgage contract before it reaches its maturity date.
How Early Can You Renew Your Mortgage?
Lenders are required by law to notify you 21 days before your term ends. But it’s often possible to renew well in advance of that timeframe. In fact, most lenders will allow you to renew 4 – 6 months before the end of your term.
Be advised, however, that renewing outside of a lender’s particular renewal window could result in a prepayment penalty. Be sure to contact your lender to determine exactly how early you can renew your mortgage.
Understanding Early Renewal Offers
An early renewal offer from your lender typically will include information on their new mortgage rates, different term length options, your principal and interest payments for the new term, plus any renewal fees. It will also include a letter to sign and send back, should you accept the offer.
Early renewal offers are simply a way to secure a new contract ahead of the original maturity date. The main difference between renewing early and renewing closer to the end of your current term is that you may be able to take advantage of a promotional, lower interest rate.
Before you commit to an offer, it’s a good idea to shop around for other options and lenders. It’s good practice to start looking around 120 days from your renewal date. This way, you can get a good sense of what the rate environment looks like in advance and give yourself plenty of time to compare your options before selecting what’s best for your current needs.
Why Renew A Mortgage Early?
Here are some common reasons homeowners choose early mortgage renewal.
Secure A Lower Interest Rate
If you’re nearing renewal at a time when interest rates are lower than your current rate, you might want to take advantage by renewing early. Securing a lower rate will effectively lower your monthly mortgage payment – and it could save you money.
You might also think of early mortgage renewal as a defensive play, especially if you’re concerned about the possibility of rates rising before your current term reaches maturity. In that case, you may be tempted to secure your rate sooner to avoid a potentially higher interest rate later on.
Market factors aside, your lender may offer early renewal incentives, such as a lower interest rate, to encourage you to keep doing business with them for another term. In that sense, early mortgage renewal can be beneficial to the lender as well. You’ll want to keep this in mind when it comes time to negotiate the best possible interest rate.
Change Your Loan Type Or Term
A mortgage renewal allows you to make a change to your loan type. For instance, borrowers with a variable-rate mortgage may want to switch to a fixed-rate mortgage as part of an early renewal if rates are on the rise. You may also have the option to switch from a closed mortgage to an open mortgage, or vice versa.
As mentioned, your renewal letter will likely include multiple term length options to choose from. If you’ve experienced or are anticipating certain changes to your marital status, income, expenses, or if you plan to sell your home, a change in term length could work in your favour. We’ll get into more details on that later on.
Negotiate With Multiple Lenders
Rates and term options can vary between lenders, and you may find a deal somewhere else that better suits your financial situation.
Fortunately, mortgage renewal periods present an opportunity to negotiate with lenders, or even switch mortgage providers. Depending on your situation, you may want to switch sooner rather than later. Keep in mind that changing lenders may incur a mortgage discharge fee from your current lender, as well as additional fees you’ll owe your new lender. You may also be required to take another mortgage stress test.
Whether you stay with your current lender or decide to switch, starting the shopping process early can be a smart option. It can give you more time to negotiate the best possible interest rate from multiple lenders. You may even be able to present an offer letter from one lender as a way of negotiating a lower rate with another lender.
Working with a mortgage broker can be an effective way to compare offers from multiple lenders at once without having to reach out to each one individually.
Should You Renew Your Mortgage Early?
The decision to renew early will depend on a variety of factors related to your circumstances and financial situation. As you get closer to the end of your current term, make sure to reevaluate your goals so you can get a better idea of where you are now and where you want to be in the next few years.
When deciding whether early renewal might be right for you, consider whether you’ve recently had, or anticipate, changes to any of the following:
Marital Status
A change in marital status may come with significant financial implications, one being your ability to make monthly mortgage payments.
If you’ve saved the date and have plans to get married, it may be advantageous to coordinate your renewal with this major life event. An early renewal may help make that timing easier.
Similarly, if you’re planning to get divorced and know when that will be finalized, you could use an early mortgage renewal to shorten your term in a way that aligns with this change in your marital status.
Note that adding a new spouse or removing an ex-spouse from the title to your home will require a refinance and cannot be done with a renewal.
Income Level
A change in income can come with either positive or negative implications for your ability to repay a mortgage.
If your income increases, you may have the potential to pay your mortgage off faster with higher and more frequent payments. In this case, renewing early could help you start achieving your repayment goals sooner. One way to do this would be to renew into an open mortgage from a closed mortgage.
Conversely, a reduction in income could negatively impact your ability to afford mortgage payments. An early mortgage renewal might help ease this burden if the new contract comes with a lower interest rate or term length options that effectively lower your monthly mortgage payment.Keep in mind that you won’t be able to extend or otherwise change your amortization period when renewing your mortgage or switching. A change in amortization would require you to refinance your mortgage.
Monthly Expenses
Similar to shifts in income, a change in your monthly expenses could impact the amount you’re able to pay toward your mortgage.
Depending on the options available, an early renewal might help you time any changes to your mortgage rates, term, or type with whatever positive or negative changes you might see in your monthly expenses.
Plans To Sell Your Home
When you signed your current mortgage contract, you might not have imagined selling your home and moving before the term was up. But, as with most things in life, housing needs and desires tend to change.
If you’ve decided to sell your home, you may want to renew into a shorter term with a maturity date that roughly coincides with when you plan to sell.
Pros And Cons Of Early Mortgage Renewal
When weighing the advantages and disadvantages of early renewal, it’s important to remember that it’s not fundamentally different from any other renewal, except in the sense that you’re taking action sooner.
With that in mind, let’s look at some benefits and drawbacks of early renewal.
Pros
The primary benefit of renewing early is the potential to secure a lower interest rate for your next mortgage term. There are three main ways this might happen:
- Promotional rates: Because lenders want to continue doing business with reliable customers, they will often send early renewal offers with promotional interest rates that are lower than the rates they advertise elsewhere.
- Favourable market conditions: If interest rates have fallen in general since your last mortgage term started, renewing early could be a way to lock in a better rate while the market favours borrowers.
- Negotiation with lenders: By starting the research process early, you give yourself more time to shop lenders for the best rate possible, and decide if you want to switch lenders at renewal.
The other major benefit to renewing early is that it could help you to more optimally align your mortgage needs with a major life event that may impact your ability to make monthly payments.
Cons
Early renewal comes with potential drawbacks as well.
When considering an early renewal offer from your current lender, remember that you might be able to get a rate that’s even better than the promotional rate in the initial letter. The promotional offer itself isn’t a con, of course. It’s just important to understand that accepting the offer without negotiation could mean you don’t get the best possible rate.
Similarly, there’s nothing wrong with locking in a good rate when market rates are lower in general. But if you renew early and rates continue to drop before your term is up, you could miss out on an ever better rate. It can be difficult to time the market this way, so this isn’t a drawback of early renewal per se. It’s just something to be aware of as you make your decision.
The Bottom Line
When considering an early mortgage renewal, it’s important to weigh all your options, compare offers and understand the pros and cons to make sure that your decision is worth it financially. For guidance, you may consider consulting with a mortgage broker to find the best mortgage product with the best interest rate for your specific needs.
If you’re approaching the end of your current mortgage term, explore your renewal options with Rocket Mortgage Canada, UL (Rocket Mortgage™) today.