What’s the Cost of an Early Mortgage Renewal in Canada?

Reasons for Renewing your Mortgage Early

There are many reasons why you may need to look into renewing your mortgage contract early. Here are some of the most common.

1. Interest rates have dropped. Depending on what the most recent mortgage rates are compared to your current mortgage rate, even with a prepayment penalty, it may make the most financial sense to refinance your mortgage before your mortgage renewal date.
2. Change in your financial situation. This can mean you are making more money, less money, or even that your credit score has improved dramatically and you can get a much better rate than what your current mortgage is at.
3. Moving and selling your home. This will also be considered breaking your mortgage and is very common.
4. Change is your family situation. This is usually separation or divorce. Whether one party is keeping the home or it is being sold, the mortgage contract will need to be broken. It will get broken with the sale of the home or when one party buys the other one out.

No matter the reason, it is best to discuss your options for early renewal with your lender, other lenders, or even an experienced mortgage broker. In some cases your current lender may even be able to find a way to blend your old mortgage term into a new one.

Penalty for Renewing Early

Whether the reasons for renewing your mortgage early are avoidable or not, your lender will let you know if there is a penalty or not. This information will also be included in your original mortgage contract. This penalty is known as a prepayment penalty because you are technically paying out your mortgage contract early with a new loan. Whether you have to pay this penalty or not depends on if you have an open or a closed mortgage.

An open mortgage means that you can make extra payments or remortgage at any time without any penalties. With a closed mortgage, there will be penalties for extra payments beyond your yearly allotted amount. Not all lenders will offer open mortgages, but those that do charge a higher interest rate than that of closed mortgages which is one of the reasons that closed mortgages are more common.

If you are refinancing an open mortgage then you will only have to pay an administration or a loan fee, depending on the lender’s policies. With a closed mortgage, the penalty is usually 3 months of interest payments at your current mortgage rate, or sometimes the interest rate differential. The differential is calculated by the current interest rate, new interest rate and how long is left in the mortgage term you are refinancing.

Penalties Depending on the Lender

The lender that you use will make a difference on the prepayment penalty as well as the type of mortgage that you have.

TD

When it comes to breaking a mortgage, the penalty is based on a few factors but the main one is the kind of mortgage you have. With TD, an open mortgage, whether the interest is fixed or variable, there is no penalty. With a closed, variable rate mortgage, there is a penalty. The penalty is usually 3 months interest. A closed, fixed rate mortgage also has a penalty. The penalty for this type of mortgage is 3 months interest or the interest rate differential amount, whichever amount is greater.

Scotiabank

Breaking a mortgage with Scotiabank is the same prepayment penalty fees as TD. They also have a prepayment calculator on their website that will help you to determine the exact amounts.

RBC

When it comes to breaking a mortgage with RBC. The fees are the same as well. 3 months interest for a closed variable rate mortgage and the interest rate differential for a closed fixed rate mortgage.

BMO

BMO charges the same prepayment penalty rate as the other banks. Keep in mind that the amounts will vary depending on the specifics of your mortgage contract.

CIBC

Just like the rest of the large banks, CIBC has the same prepayment charges. That being said, all of the big banks do have some alternatives to avoid a penalty.

When to Renew your Mortgage

If refinancing is something you are interested in but don’t want to pay any penalties, look and see how much time is left in your mortgage term. With a closed mortgage you can refinance 120 days before the end of your mortgage term. If you are close to that time frame, then it may be worth it to start looking at your options.

If there is longer than 120 days left in your mortgage term, it still may make the most sense to refinance. You may have no choice, but in other cases, even with a penalty, it makes the most financial sense. Before you make any decisions though it is best to check with your lender to see what kind of fees you may incur besides a prepayment penalty. There are other fees that may be involved such as:

• Admin fees
• Appraisal fees
• Reinvestment fees
• Mortgage discharge fees

Avoiding Mortgage Penalties

Instead of renewing your mortgage term, there are some other options that you can explore.

1. Port your mortgage. This option works if you are selling your home and purchasing another one. Basically this means that your principal amount, amortization period, interest rate and everything else included in the mortgage just moves over to the new home.
2. Take equity out of your home. This option works if you are looking to early mortgage renewal to gain access to extra money, such as a debt consolidation mortgage. Instead of remortgaging, another option would be to get a home equity loan or a home equity line of credit. These options will allow you to access up to 80% of your home’s value minus what you owe on your mortgage. You may have to pay an appraisal fee but there will be no mortgage penalties.
3. Renewing within 120 days of the term ending. It is understandable though, that you may not be able to wait that long. It is best to talk to your current lender or a mortgage broker to find out how early you can renew without a penalty. In some cases you may be able to avoid a penalty if you are staying with the same lender.
4. Blend and Extend. This is when lenders allow you to extend the length of your mortgage before the end of the term. How it works is the old interest rate and new interest rate are blended together into a new term. With this method you can still lower your interest rate while avoiding any prepayment penalties. The lender will have to let you know how they are going to calculate your new interest rate and what it will be.

In general though, going with a new interest rate, a new term, and a new lender will result in you having to pay the prepayment penalty. As long as the current mortgage is a closed mortgage, that is.

Negotiating a Prepayment Penalty

While it isn’t very common, some lenders will allow you to negotiate the prepayment penalty. This would have to be done before you sign the contract though. It wouldn’t happen part way through the term when you are looking to sell or refinance. When you make a deal for your mortgage term, the prepayment penalty amounts will be listed in your contract, if they apply.

Pros and Cons

When you are deciding if you are going to renew your mortgage early, it is important to consider the positive and negative impacts this decision will have on your finances as well as your overall mortgage term.

Pros

1. Lower interest rate. Depending on how much lower the new interest rate is compared to the old interest rate, it may be worth it. This could help you save monthly by reducing your mortgage payments.
2. Mortgage free faster. Keeping your monthly mortgage payments the same when you actually have a lower mortgage payment could get you mortgage free much faster. However, this does depend on the penalty amount as well as the overall cost of the mortgage.
3. Lock in the lower rate for the term. This is common when it comes to variable rate mortgages or if interest rates are expected to increase dramatically when it comes time for you to renew. If the difference is substantial, then it could still be very worth it.

Cons

1. Paying more money overall. This is because the cost of penalties and fees often add up to thousands of dollars. This amount could easily end up being more than what you would save by refinancing. It is important to do those calculations before making any refinancing decisions.
2. Being unable to qualify. If the economic conditions, or even your personal finances, or both have changed, then there is a possibility that you might not be able to get approved to be refinanced early. This could put a major hiccup in your current mortgage and ownership of your home. Make sure you do your research on your approval odds as well, before you begin the refinancing process.

Get a Mortgage with Spring Financial

There really are so many reasons as to why you would consider breaking your mortgage term early. Before you make any decisions, it is important to do your research. Take a look at the rates out there, check and see if a second mortgage or even a HELOC or home equity loan would be the right answer for you. Also, keep an eye on your credit score as well as your debt to income ratio. These factors will help you to determine your overall odds of approval and if it is worth it to break your mortgage.

Spring Financial is able to help you with any of these options. We offer mortgages, debt consolidations, home equity lines of credit and combinations that you could help you with whatever you need. All you need to do is apply online and one of our licensed agents will be able to help you through the process and, in order to make the process as convenient for you as possible, everything can be done online, though phone calls or even through text message. You can also contact us through live chat or at 1-888-781-8439. For whatever reason you are looking at getting a mortgage or tapping into your home’s equity, we can help.