Jan 13

Does Renewing a Mortgage Early Cost or Save You Money?

TL;DR:

Renewing your mortgage early can save you money if interest rates are rising—but locking in too soon or without comparing rates could cost you more in the long run. This guide breaks down when early renewal makes sense, what to watch out for (like penalties and missed savings), and how to get the best deal with or without a broker.

What Is Early Mortgage Renewal?

Mortgage renewals are a necessary part of homeownership. While some look at it as a routine process, like going to the dentist, others may want to get it out of the way as soon as possible—but is this the best approach?

An early mortgage renewal means signing a new mortgage term before your current one ends— it can be done at any point up to 180 days before your term ends but typically it is between 120 to 180 days in advance. Lenders might offer it to avoid rate hikes, to retain your business and to accelerate the process by letting you do it online through your lender’s online banking service. But jumping at the first offer can leave money on the table.

Here’s a look at early mortgage renewals, along with the costs and benefits of renewing a mortgage early.

How Long Do You Have to Renew Your Mortgage?

At the end of your mortgage term, if you still have a balance owing on your mortgage you can either pay off the balance in full or sign a new mortgage contract. Because paying ones balance in full is a tall order, you will have to renew your mortgage by the time your mortgage term ends. Your lender will send you a mortgage renewal notice at least 21 days before the term is up. However, whether you decide to stay with your current lender or switch lenders for a better rate, you should be on the ball about this and make a decision within at least 30 days before your renewal date. If you do not take action to renew your mortgage, it may be renewed automatically into an open term.

When Can You Renew Your Mortgage?

Lenders may allow you to renew your mortgage early, within 121 to 180 days prior to your renewal date, without penalty.

But don’t be alarmed if a lender does not offer you an early renewal rate. Not all lenders offer early renewals. Many lenders offer you a mortgage renewal approximately 4 months prior to your renewal date (120 days).

If your lender does offer early renewal, it’s important to note that this is not always the best option for most borrowers.

Lenders will typically only offer an early renewal in certain cases because most lenders only reserve rates for 120 days prior to the disbursement date. This means that if you want to look at other options and you are 180 days prior to your renewal date, it will trigger a penalty to switch to a different lender. Therefore, the existing lender hopes you simply sign the early renewal and move on, without having any competition on their end.

Key timeline when renewing your mortgage early

• 120 days before term ends: Most lenders allow early renewal without penalty starting around the 4-month mark.
• Up to 180 days in advance: Some lenders may offer this even earlier, but penalties often apply if switching providers at this stage.

Should You Renew Early?

The only time an early renewal is beneficial for borrowers is when you are in a rate increasing environment. That’s because the existing lender is essentially saying, ‘’I will renew your mortgage right now at a current rate before rates go up.” Whereas, if you want to get a current rate with any other lender right now, you will have to pay a penalty to break the contract with the existing lender.

However, unless the rate increasing environment is drastic, it’s in the best interest of the borrower to see what other lenders can offer. This means you should review renewal options within 120 days of the renewal date. This way, the existing lender and all other lenders can compete for your business.

What to Consider Before Renewing?

Since you signed your last mortgage agreement, your life has probably changed in one or more ways. So when renewing your mortgage, it’s important to find a mortgage product that suits your current financial situation, lifestyle, and goals.

Income Changes

Has your income changed—e.g. promotion and raise, loss of income, or retirement? You may be willing to pay off your mortgage faster with higher and more frequent payments, if your income has increased. Or, you might want to lower your monthly mortgage payments if your income is lower.

However, if you want to renew and lower your payments, you will need to extend your amortization. For example, if you have 20 years remaining on your mortgage, perhaps you choose to re-extend it to 25 years. For you to do that though, you will need to refinance. If you do a straight renewal or switch to a different lender, you must keep the exact amortization remaining.

Recap:

• Promotion or raise? You may want to increase payments.
• Reduced income? Lower payments may be better—but that could require refinancing.

Expenses

Your monthly expenses will affect what you can afford for mortgage payments. More expenses? Lower your mortgage burden. Fewer? Consider accelerated repayment.

Marital Status

Has your marital status recently changed? Are you married or in a common-law relationship now? Or have you divorced or separated? If you have a dual-income household, you may wish to pay off your mortgage faster with larger and more frequent payments.

Risk Tolerance

Are you willing to take more or less of a financial risk than before? If you’re willing to take a risk, you may opt for a variable-rate mortgage with an interest rate that tends to be lower than a fixed interest rate but fluctuates with the market.

Or, if you want to play it safe, you can choose a fixed-rate mortgage with an interest rate that tends to be higher than a variable rate but stays the same for the duration of your mortgage term.

Financial Goals or Milestones

Your short-term and long-term financial goals may have changed in the last few years. If so, this will affect the type of mortgage product you’ll need.

For example, if you are planning to start a family, want to pay for home renovations, or pay for your child’s tuition, you may want to tap into your home equity to meet your current financial goals.

How the Mortgage Stress Test Still Applies?

Federally-regulated financial institutions use the mortgage stress test to determine if borrowers can afford their mortgages in the current market and if interest rates increase. If you decide to switch to a new federally-regulated lender, you’ll have to pass the mortgage stress test again. That means qualifying at a higher rate—even if your actual rate is lower.

You will need to prove that you can afford payments at a qualifying interest rate that is usually higher than your actual mortgage rate. And if you don’t qualify, then you will either have to stick with your current lender or switch to a lender that isn’t required to use the mortgage stress test, such as a private lender.

Check out our blog: Understanding the Ins and Outs of Private Mortgages

In other words, if you fail the mortgage stress test:

• Stay with your current lender.
• Or look at private lenders not subject to the stress test.

Should You Accept the Auto-Renewal Mortgage Rate from Your Lender?

Since your lender’s first offer is rarely the best offer available, you shouldn’t accept the auto-renewal mortgage rate without shopping around first. And you should only accept it if the auto-renewal rate is one of the best available. Otherwise, you’re better off trying to negotiate a better rate with your lender or switching lenders for a better rate. Always compare your auto-renewal rate to what’s available on the market.

Benefits of An Early Renewal

If you’re concerned that interest rates will increase, locking in a low-interest rate early on will help reduce the risk of having a higher interest rate when your mortgage term is up. But the benefit of early renewal depends greatly on the rate being offered. If the renewal rate is lower than your current rate or the anticipated future rate, renewing early can potentially help you save money.

Pros recap:

• Rate protection: Lock in a rate if interest rates are climbing.
• Convenience: Avoid last-minute scrambling.
• Potential savings: If rates continue to rise, early renewal could be cheaper long term.

Drawbacks of An Early Renewal

Locking in a mortgage rate early may come at a cost, such as an extra 0.10 to 0.30 of a percentage point on your new locked-in interest rate. And if interest rates end up dropping before your mortgage term is up, then locking in a rate early on could mean missing out on better rates.

Early renewal may also come with a penalty of breaking your mortgage term early. This penalty is usually three months’ interest at your current rate or the interest rate differential—which is calculated using the current rate, the new rate, and the remaining months left in your mortgage term.

Cons recap:

• Higher rates: Early renewal offers may not be the lowest available.
• Lack of competition: Accepting your lender’s first offer skips rate shopping.
• Penalties: Renewing before 120 days may trigger fees if switching lenders.
• Missed savings: Rates could drop before your renewal date, and you’ll be stuck.

How to Get the Best Deal on Mortgage Renewal?

Start shopping 120 days out. That’s when you can:

• Compare multiple offers.
• Switch lenders without penalty.
• Get a mortgage broker to negotiate for you.

Why Talk to a Mortgage Broker?

Even if you decide to negotiate with your current lender, you likely won’t get the best mortgage rate available. But a broker can help with your mortgage renewal and let you know if renewing your mortgage early will save you money. If you are looking at switching lenders by yourself, a broker will help you take everything into consideration including hidden costs that often arise like appraisal and legal fees and a potential new mortgage insurance premium. They will also know about your eligibility for cashback or bonus offers. Your mortgage broker will find the best rates and mortgage products, negotiate for you, and handle the paperwork for your mortgage loan application. A broker will help you evaluate if renewing early with your current lender or another is truly in your best financial interest.

Final Take:

Only renew early if:

• Rates are rising significantly.
• Your lender’s offer is actually competitive.
• You’ve evaluated the costs vs. benefits with a pro.

Otherwise, wait until the 120-day mark to compare offers and put lenders in competition for your business.

In any case, a broker is in your best interest to:

• Access rates from multiple lenders.
• Help you avoid early renewal traps.
• Negotiate better terms.
• Simplify paperwork.

The Chris Allard Team