Too often is the case that Canadians fail to review the terms of their mortgage contract, and contrast them with what is currently available on the market. Early renewal, and renewal in general, give you, the homeowner, an excellent opportunity to negotiate a lower rate for your next term. It also allows you to capitalize on today’s rates before they rise, if that is indeed the path they are headed.
An early renewal generally means that you will be breaking the terms of your current mortgage to enter into a new term, at a more desirable rate. Breaking a contract will generally result in a prepayment penalty of either three months interest at your current interest rate or the interest rate differential (IRD).
To weigh the prepayment penalty against your potential savings, there are two online calculators you can utilize. First of all, get a ballpark figure on what your penalty will look like by use of a Mortgage Penalty Calculator.
Secondly, to deduce your interest savings over the term you would wish to commit to (let’s say five years being the most common), pop in your current rate, the rate you can attain now, and a rate one per cent in excess of this (hedging the prediction that in one or two years, or however many are left on your term, rates will rise this amount) on a Mortgage Payment Calculator. The following example can be used to see how this works.
John has a mortgage balance of $200,000. He has one year left on his term, at 5%. If he renewed early, he could attain a five-year fixed rate of 3.64%. In cancelling his current term John could expect to pay roughly $5,400 in IRD or $2,500 if the lender went with a three month insurance payment penalty. However, by lowering his rate he would save roughly $2,700 (based on a 25 year amortization) in the first 12 months, and roughly an equivalent every year following if rates rose higher than that which he attained.
Early renewal has one other major appeal. It gives the homeowner opportunity to change the terms of their mortgage. Perhaps you wish to renew into a variable mortgage at 2.20%, or a cash back mortgage that could fund an urgent repair or renovation your home needs. Perhaps your current mortgage does not allow for large prepayments and you are expecting a surge of funds to come in within the next 12 months that you wish to apply to your principle.
Whatever your scenario, discuss the option thoroughly with a mortgage broker to deduce whether early renewal will really benefit you.