Could Renewing Your Mortgage Early Save You Money?

If you bought a home or renewed your mortgage between 2022 and 2024, there's a good chance your current mortgage rate is higher than the rates available today.

If your mortgage renewal date is still a year or two away, you may be wondering whether you should simply wait.

But what if waiting actually costs you more?

Depending on your current interest rate, mortgage balance, remaining term and the cost of breaking your mortgage, an early mortgage renewal or refinance could potentially save you money.

The key is looking at the total cost of staying versus the total cost of making a change.

Your Mortgage Renewal Date Isn't the Only Date That Matters

When homeowners think about mortgage renewal, they often focus on the date their current term ends.

But if you're paying a higher interest rate, the time between now and that renewal date matters too.

If you simply keep your current mortgage, you'll continue paying your existing interest rate for the remainder of your term.

So the question isn't only:

"What's my mortgage penalty?"

It's:

"How much interest will I pay if I keep this mortgage until maturity?"

That number can change the conversation.

What If Breaking the Mortgage Comes With a Penalty?

Breaking a closed mortgage before the end of the term can result in a mortgage prepayment penalty.

The amount depends on your mortgage contract, lender, interest rate and the amount of time remaining on your term. Depending on the mortgage, the penalty may be based on three months' interest or an interest rate differential (IRD). The exact calculation varies, so you'll want to get the actual payout amount from your lender. Financial Consumer Agency of Canada — Mortgage prepayment penalties

And yes, a penalty can make an early mortgage change look expensive.

But that doesn't necessarily mean it isn't worth considering.

Look at the Cost Over the Remainder of Your Term

This is where the calculation gets interesting.

Imagine you're currently paying a higher interest rate and still have significant time remaining on your mortgage term.

You have two scenarios to compare.

Option 1: Stay with your current mortgage

You keep your existing mortgage until maturity and continue paying your current interest rate.

You can calculate the amount of interest you expect to pay over the remainder of the term.

Option 2: Change your mortgage early

You break your current mortgage and move into a lower-rate mortgage.

Now you need to consider:

• Your mortgage payout

• Your prepayment penalty

• Any applicable costs associated with changing the mortgage

• The new mortgage rate

• The interest you would pay on the new mortgage over the comparable period

In some situations, the cost of breaking the mortgage and moving to a lower rate can still be less than the interest you would have paid by staying in your existing mortgage until maturity.

That's the part many homeowners don't consider.

A penalty isn't necessarily the deciding factor.

The total cost is.

What If the Penalty Is Included in the New Mortgage?

Depending on the lender, mortgage structure, available equity and your qualification, some costs associated with breaking an existing mortgage may be included in the new mortgage rather than paid out of pocket.

If that is an option, it doesn't mean the penalty disappears.

You're still borrowing that money and paying interest on it.

But it can change the calculation.

If the interest savings from the lower mortgage rate are greater than the cost of the penalty and the additional interest associated with financing it, the overall numbers could still work in your favour.

That's why it's important to look at the whole picture, rather than deciding based on the penalty alone.

The Amount of Time Left on Your Mortgage Matters

This is a big part of the equation.

If your mortgage is coming up for renewal in a few months, paying a significant penalty to access a lower rate may not leave enough time for the interest savings to make up the difference.

But if you have a year or two remaining — and you're paying a substantially higher rate than what is currently available — there may be a much larger opportunity to save.

The longer you have left on your current mortgage, the more important it becomes to compare:

The interest you would pay by staying

against

The penalty, costs and interest associated with changing your mortgage.

What About an Early Mortgage Renewal?

Breaking your mortgage isn't necessarily the only option.

Depending on your lender and mortgage, you may be offered an early mortgage renewal or a blend-and-extend option.

The terms and costs can vary, so it's worth finding out what your current lender is offering and comparing it with your other options.

An early renewal may be a better fit than breaking your mortgage.

Or it may not.

Again, it comes down to the numbers.

When Could an Early Mortgage Renewal or Refinance Make Sense?

It's worth looking at your options if:

• You locked into a higher fixed mortgage rate between 2022 and 2024.

• Your current rate is meaningfully higher than today's available mortgage rates.

• You still have significant time remaining on your mortgage term.

• Your mortgage balance is large enough for the rate difference to create meaningful savings.

• Your potential interest savings could outweigh your mortgage penalty and other applicable costs.

• A lower interest rate could reduce your monthly mortgage payment.

• You want to know whether waiting until your renewal date is actually your most cost-effective option.

It doesn't mean you'll necessarily save money.

It means it's worth finding out.

And Sometimes Waiting Makes More Sense

An early mortgage renewal or refinance isn't automatically the right answer.

If your penalty is high, the rate difference is small or your mortgage is already close to maturity, waiting may be the better option.

There may also be an early-renewal option through your existing lender that makes more sense than breaking the mortgage.

The point isn't to convince you to break your mortgage.

The point is to make sure you know what the numbers actually say before you decide.

Don't Guess at Your Mortgage Penalty

If you're considering changing your mortgage before maturity, start by getting the actual payout information from your lender.

You'll want to know:

• Your current mortgage balance

• Your current interest rate

• Your maturity date

• Your remaining amortization

• Your prepayment penalty

• Any other applicable costs

From there, you can compare the cost of keeping your current mortgage with the cost of changing it.

The Bottom Line

If you locked into a higher mortgage rate during 2022, 2023 or 2024, your renewal date may be worth looking at before you automatically wait for it.

A lower mortgage rate doesn't automatically mean you should break your mortgage.

And a mortgage penalty doesn't automatically mean you shouldn't.

What matters is the total cost over the remainder of your term.

If the interest you would pay by staying in your current mortgage is greater than the combined cost of breaking it and moving to a lower rate, an early mortgage renewal or refinance may be worth considering.

Sometimes waiting is the right decision.

Sometimes changing your mortgage sooner makes more sense.

The only way to know is to run the numbers.

Wondering if an early mortgage renewal could make sense for you?

If you're currently paying a higher mortgage rate and still have time left on your term, I can help you look at the numbers and compare your options.

You may be better off waiting until your scheduled renewal.

Or you may find that making a change sooner could save you money.

Let's figure out which one makes sense for you.