Early Mortgage Renewal: How Does it Work and What Are the Pros and Cons?
Many Canadians renew their mortgage more than once before finishing paying it. When they renew, it depends on how long their mortgage lasts, which could be a few months or even over 5 years.
You might have heard about people renewing their mortgage before it’s due. Perhaps your lender even offered you an early renewal. But what does early mortgage renewal mean, and should you consider it?
Let’s explain early mortgage renewal, how it works, and the benefits and disadvantages of doing it sooner.
Early Mortgage Renewal: What Does it Mean?
Simply put, your entire mortgage balance is due when your term ends. That’s why many homeowners renew their contracts several times.
Early mortgage renewal means renewing your current mortgage contract before its supposed end date.
How Early Can I Renew My Mortgage?
Lenders must legally inform you 21 days before the end of your term. But often, you can renew even earlier than that. In fact, many lenders allow you to renew your mortgage 4 to 6 months before the term ends.
Remember that renewing outside your lender’s designated renewal period might incur a prepayment penalty. Contact your lender to find out the exact timeframe for early mortgage renewal.
What You Need to Know About Early Mortgage Renewal Offers
A lender’s early renewal offer usually contains details about their updated mortgage rates, various term lengths to choose from, your expected principal and interest payments for the new term, and any associated renewal fees. Additionally, it will include a letter of acceptance if you decide to proceed with the offer.
Early renewal offers are a method to lock in a new contract before the original maturity date. The key distinction between renewing early and waiting until closer to the end of your current term is that you might benefit from a promotional, reduced interest rate.
Before accepting any offer, it is wise to explore other options and lenders. A good rule is to begin searching around 120 days before your renewal date. This allows you to gauge the rate environment early and gives you ample time to compare your choices before deciding what best aligns with your current requirements.
Why Early Mortgage Renewal?
Below are a few typical reasons why homeowners opt for early mortgage renewal.
Lock in a Reduced Interest Rate
If you’re approaching renewal and the current interest rates are lower than what you’re paying, it’s an excellent opportunity to consider early renewal. Getting a lower rate means reducing your monthly mortgage payment, potentially saving you money in the long run.
Early mortgage renewal is a defensive move, especially if you’re worried about rates increasing before your current term ends. In such a scenario, you should secure your rate earlier to avoid potentially facing a higher interest rate down the line.
Putting market factors aside, your lender might provide incentives for early renewal, like a reduced interest rate, to motivate you to continue working with them for another term. In this way, early mortgage renewal can also benefit the lender. Remember this when negotiating for the best possible interest rate.
Adjust Your Loan Type or Term
When you renew your mortgage, you can adjust your loan type. For example, suppose you currently have a variable-rate mortgage and interest rates are increasing. In that case, consider switching to a fixed-rate mortgage. Additionally, you can switch between a closed mortgage and an open mortgage or vice versa.
As mentioned, your renewal letter will offer various term lengths. If your marital status, income, or expenses have changed, adjusting the term length might be beneficial. We’ll delve into more details on this later.
Shop Around and Negotiate with Multiple Lenders
Interest rates and term options differ among lenders, and you might discover a better deal elsewhere that aligns more closely with your financial circumstances.
When it’s time to renew your mortgage, you can negotiate with your current lender or consider switching to a different provider. Depending on your circumstances, you might prefer to switch sooner. Remember, changing lenders could involve paying a mortgage discharge fee to your current lender and other costs to the new one. Additionally, you might need to undergo another mortgage stress test.
Whether you stick with your current lender or opt for a change, initiating the shopping process early is wise. It provides extra time to negotiate the most favourable interest rate from various lenders. You might even use an offer letter from one lender to leverage a better rate with another.
Collaborating with a mortgage broker is an efficient method of comparing offers from multiple lenders simultaneously, eliminating the need to contact each one separately.
Is Early Mortgage Renewal Right for You?
Deciding whether to renew early hinges on several factors tied to your circumstances and financial position. As your current term nears its end, reassess your goals to clarify your present situation and aspirations for the coming years.
When contemplating if early renewal is suitable for you, think about whether you’ve recently experienced or expected changes in any of the following:
Marital Status
A change in marital status can have notable financial consequences, including its impact on your ability to afford monthly mortgage payments.
If you’ve set a wedding date and are planning to get married, aligning your renewal with this significant life event could be beneficial. Opting for an early renewal might facilitate smoother timing for your plans.
Likewise, if you’re anticipating a divorce and have a clear timeline for its finalization, an early mortgage renewal could allow you to adjust your term to coincide with this shift in your marital status.
Remember that adding a new spouse or removing an ex-spouse from the title to your home necessitates a refinance and cannot be accomplished through a renewal.
Level of Income
A shift in income can have either favourable or unfavourable consequences for your capacity to repay a mortgage.
With increased income, you can pay off your mortgage more rapidly through higher and more frequent payments. Early renewal could accelerate your progress toward repayment goals in such a scenario. Transitioning from a closed mortgage to an open mortgage during renewal could facilitate this approach.
Conversely, a decreased income could hinder your ability to manage mortgage payments. Early mortgage renewal could alleviate this strain if the new contract offers a lower interest rate or term length options that reduce your monthly payment. Remember, you can’t extend or alter your amortization period during renewal or switching; refinancing would be necessary for such a change.
Monthly Expenditures
Just like changes in income, alterations to your monthly expenses could affect the amount you can allocate toward your mortgage payments.
Based on the available choices, opting for early renewal could help you align any adjustments to your mortgage rates, terms, or types with any positive or negative alterations in your monthly expenses.
Intentions To Sell Your Home
When you entered your current mortgage agreement, you might not have considered the possibility of selling your home and relocating before the term ended. However, as is often the case with life, housing needs and preferences can evolve over time.
If you’ve chosen to sell your home, consider renewing your mortgage for a shorter term, aligning the maturity date with your anticipated selling timeline.
Advantages and Disadvantages of Early Mortgage Renewal
When considering the pros and cons of early renewal, it’s crucial to recognize that it’s essentially similar to any other renewal, except that you’re acting sooner.
Considering that, let’s examine some advantages and disadvantages of early renewal.
Advantages
The main advantage of early renewal is the opportunity to lock in a lower interest rate for your upcoming mortgage term. This can occur in three primary ways:
- Promotional rates: Lenders often send early renewal offers with promotional interest rates lower than those advertised elsewhere because they aim to retain reliable customers.
- Favourable market conditions:If interest rates have dropped since the start of your last mortgage term, early renewal could allow you to secure a better rate while the market is favourable for borrowers.
- Negotiation with lenders:Initiating the research process early allows you ample time to explore various lenders for the most favourable rate and determine if you wish to switch lenders upon renewal.
Another significant advantage of early renewal is the potential to better synchronize your mortgage requirements with a significant life event that might affect your capacity to make monthly payments.
Disadvantages
Early renewal also carries potential drawbacks.
When reviewing an early renewal offer from your current lender, remember that you might have the opportunity to negotiate for a rate that’s even better than the initial promotional rate. The promotional offer itself isn’t a downside, but it’s essential to realize that accepting it without negotiation could result in not securing the most advantageous rate available.
Likewise, there’s no issue with securing a favourable rate when market rates are generally lower. However, if you renew early and rates further decline before your term ends, you might miss out on an even better rate. Timing the market this way can be challenging, so this isn’t a direct drawback of early renewal. It’s something to keep in mind as you weigh your decision.
Final Word
When contemplating an early mortgage renewal, it’s vital to thoroughly assess all your options, compare offers, and grasp the advantages and disadvantages to ensure your decision is financially worthwhile. For guidance, consider seeking advice from a mortgage broker to identify the optimal mortgage product with the most favourable interest rate tailored to your specific requirements.
As your mortgage term nears its end, consider exploring your renewal options with Superb Mortgages today.