Early Mortgage Renewal: How It Works, Benefits, and Drawbacks
Many Canadian homeowners go through several mortgage renewals before their loan is fully paid off. How often this happens depends on the term of their mortgage, which can range from a few months to five years or more.
You might have heard of people renewing their mortgages ahead of schedule. Perhaps your lender has even offered you the chance to renew early. But what does early mortgage renewal really mean, and is it the right choice for you?
We’ll explain early mortgage renewal, how it works, and its pros and cons to help you decide if it’s the right move for you.
What Is Early Mortgage Renewal?
The entire balance technically becomes due at the end of your mortgage term. This is why many homeowners end up renewing their mortgage several times before it’s fully paid off.
Early mortgage renewal means updating your existing mortgage agreement before the end of its term.
When Is the Earliest You Can Renew Your Mortgage?
By law, lenders must inform you at least 21 days before your mortgage term expires. However, you don’t have to wait until then to renew. Many lenders offer the option to renew as early as 4 to 6 months before your term ends.
Keep in mind that renewing your mortgage too early, outside your lender’s designated timeframe, might lead to a prepayment penalty. To avoid surprises, reach out to your lender to confirm how far in advance you can renew.
What You Need to Know About Early Renewal Offers
When your lender offers an early renewal, they’ll usually provide details about their updated mortgage rates, available term lengths, your new principal and interest payments, and any applicable renewal fees. If you’re ready to accept, they’ll include a form for you to sign and return.
Early renewal gives you the chance to lock in a new mortgage agreement before your current term ends. The key benefit of renewing early is the opportunity to secure a special offer or a lower interest rate compared to waiting until your term’s expiration date.
Before accepting a renewal offer, take the time to explore what other lenders have to offer. Starting your search about 120 days before your renewal date allows you to understand the current rates and market trends. This gives you enough time to weigh your options and choose the best fit for your financial situation.
Why You Should Consider Renewing Your Mortgage Early
Here’s why many homeowners decide to renew their mortgage ahead of schedule.
Lock In a Better Interest Rate
If interest rates have dropped below your current rate as you approach renewal, renewing early could be a smart move. By locking in a lower rate, you’ll reduce your monthly mortgage payments and potentially save money in the long run.
Early mortgage renewal can also be a smart move if you’re worried about interest rates going up before your term ends. In this case, locking in your rate early can help you avoid paying a higher rate in the future.
Beyond market trends, your lender might offer perks like a lower interest rate to encourage you to renew with them for another term. This benefits both you and the lender. When it’s time to renew, keep this in mind so you can negotiate the best possible rate.
Switch Your Loan Type or Term Length
When renewing your mortgage, you have the opportunity to adjust your loan type. For example, if interest rates are increasing, you might want to switch from a variable-rate mortgage to a fixed-rate one. You could also change from a closed mortgage to an open one, or the other way around, depending on your needs.
Your renewal letter will probably offer several term-length options. If you’re going through changes in your personal life, such as shifts in income, expenses, or marital status—or if you’re thinking about selling your home—a different term length might be a good fit for you. We’ll dive into this in more detail later.
Shop Around and Negotiate with Different Lenders
Lenders offer different rates and term options, so you might discover a better deal with another lender that fits your financial needs more closely.
Mortgage renewal periods give you the chance to negotiate with your current lender or even switch to a new one. If your situation calls for it, making the change sooner could be beneficial. However, keep in mind that switching lenders might involve a discharge fee from your current provider, plus other costs from the new lender. You might also need to pass another mortgage stress test.
Whether you stick with your current lender or choose to switch, starting your search early is a wise move. It gives you more time to compare offers and negotiate a better interest rate. Plus, you might be able to use an offer from one lender to get a better deal from another.
Using a mortgage broker can be a great way to compare deals from several lenders all at once, saving you the time and effort of contacting each one separately.
Is Early Mortgage Renewal the Right Choice for You?
Deciding to renew early depends on your personal situation and finances. As your current term comes to an end, take time to reassess your goals so you can understand where you stand now and where you hope to be in the coming years.
When thinking about whether early renewal is a good option for you, take into account any recent or upcoming changes in the following areas:
Marital Status
A change in your marital status can have a big impact on your finances, including your ability to keep up with monthly mortgage payments.
If you’re planning to get married, aligning your mortgage renewal with this big life change could work to your advantage. Renewing early might make it easier to manage the timing.
If you’re going through a divorce and know when it will be finalized, renewing your mortgage early could help you adjust your term to better match this major life change.
Keep in mind that if you’re adding a new spouse or removing an ex-spouse from your home’s title, you’ll need to refinance, as this can’t be done through a renewal.
Income Level
Any change in income can impact your ability to repay a mortgage, either making it easier or more challenging.
If your income goes up, you might be able to pay off your mortgage faster by making higher, more frequent payments. In this case, renewing early could help you reach your repayment goals sooner. One option is switching from a closed mortgage to an open one during renewal.
On the other hand, if your income decreases, it could make it harder to keep up with mortgage payments. Renewing early might help by offering a lower interest rate or different term lengths that reduce your monthly payments. However, remember that you can’t change your amortization period when renewing or switching lenders—any adjustments to that would require refinancing.
Monthly Expenses
Just like with income changes, an increase in your monthly expenses can affect how much you’re able to put toward your mortgage.
If the right options are available, renewing early could help align changes to your mortgage rates, term, or type with any increases or decreases in your monthly expenses.
Thinking About Selling Your Home
When you first signed your mortgage, selling your home before the term ended might not have crossed your mind. However, as with many aspects of life, your housing needs and plans can change over time.
If you’re planning to sell your home, consider renewing for a shorter term that aligns with your expected selling date.
Advantages and Disadvantages of Early Mortgage Renewal
When considering the pros and cons of renewing early, keep in mind that it’s not much different from a regular renewal, except that you’re making the decision ahead of time.
Keeping that in mind, let’s explore the potential benefits and drawbacks of renewing early.
Advantages
The biggest advantage of renewing early is the chance to lock in a lower interest rate for your next mortgage term. Here are three key ways this could happen:
- Promotional rates: Since lenders value keeping good customers, they often send early renewal offers with special, lower interest rates that aren’t available to the public.
- Favorable market conditions:If interest rates have dropped since your last mortgage term, renewing early might help you secure a better rate while the market is more favorable for borrowers.
- Negotiation with lenders:Starting your research early gives you more time to compare lenders for the best rate and decide if you want to change lenders when it’s time to renew.
Another key benefit of renewing early is that it can help you better match your mortgage with a major life event that might affect your ability to make monthly payments.
Disadvantages
Renewing your mortgage early can also have some downsides.
When reviewing an early renewal offer from your lender, keep in mind that the promotional rate in their initial offer might not be the best deal available. While the offer itself is a positive opportunity, accepting it without negotiating could mean missing out on an even better rate.
Locking at a low rate when market rates are down is a smart move. However, if you renew early and rates drop even further, you might miss out on an even better deal. Timing the market perfectly is tricky, so while this isn’t necessarily a downside of early renewal, it’s something to keep in mind as you decide.
Final Word
Before deciding on an early mortgage renewal, take the time to explore your options, compare offers, and carefully weigh the benefits and drawbacks to ensure they make financial sense. For expert advice, consider working with a mortgage broker who can help you find the right mortgage product and the best rate to fit your unique situation.
As your current mortgage term comes to an end, let Superb Mortgages help you explore your renewal options and find the right fit for you.