Whatever the reason, it is important to keep in mind that renewing early may cause you to incur fees, often referred to as a mortgage penalty. The amount you would have to pay for this penalty depends on how much time you have left on your mortgage term, who your current lender is, and your mortgage balance. That being said, depending on the reason for breaking the mortgage, you may be able to find a way to avoid the penalty fee.
Reasons for Renewing Your Mortgage Early
There are many reasons you may need to consider renewing your mortgage contract early. Here are some of the most common.
- 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.
- 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 your current mortgage rate.
- Moving and selling your home. This will also be considered a breach of your mortgage and is very common.
- Change is your family situation. This is usually a 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 be broken upon the sale of the home or when one party buys out the other.
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 off your mortgage contract early by taking out a new loan. Whether you have to pay this penalty depends on whether your mortgage is open or closed.
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 offer open mortgages, but those that do charge a higher interest rate than closed mortgages, which is one reason closed mortgages are more common.
If you are refinancing an open mortgage, then you will only have to pay an administration fee 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 using the current interest rate, the new interest rate, and the remaining time on the mortgage term you are refinancing.
Penalties Depending on the Lender
The lender that you use will make a difference in 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, whichever is greater.
Scotiabank
Breaking a mortgage with Scotiabank has the same prepayment penalty fees as TD. They also have a prepayment calculator on their website that will help you determine the exact amounts.
RBC
When it comes to breaking a mortgage with RBC, the fees are the same. 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
Like the other large banks, CIBC charges prepayment fees. That said, all the big banks offer alternatives to avoid penalties.
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, it may be worth starting to look at your options.
If there are more than 120 days left on your mortgage term, it may still 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 to do so before you make any decisions, though it is best to check with your lender to see what fees you may incur beyond a prepayment penalty. Other fees 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.
- Port your mortgage. This option works if you are selling your home and purchasing another one. Basically,y this means that your principal amount, amortization period, interest rate, and everything else included in the mortgage just move over to the new home.
- Take equity out of your home. This option works if you are looking for an early mortgage renewal to access extra funds, such as for a debt-consolidation mortgage. Instead of remortgaging, another option is to take out 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.
- Renewing within 120 days of the term ending. It is understandable,e 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.
- Blend and Extend. This is when lenders allow you to extend the length of your mortgage before the end of the term. It works by blending the old and the new interest rates 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 will 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 closed, 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,t though. It wouldn’t happen partway 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 deciding whether to renew your mortgage early, it is important to consider the positive and negative impacts on your finances and overall mortgage term.
Pros
- Lower interest rate. Depending on how much lower the new interest rate is than the old one, it may be worth it. This could help you save money each month by reducing your mortgage payments.
- Mortgage-free faster. Keeping your monthly mortgage payments the same even when you can make a lower payment could get you mortgage-free much faster. However, this depends on the penalty amount and the overall cost of the mortgage.
- 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 worthwhile.
Cons
- Paying more money overall. This is because the cost of penalties and fees often adds 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.
- Being unable to qualify. If the economic conditions, your personal finances, or both have changed, you might not be approved for early refinancing. This could cause a major hiccup in your current mortgage and homeownership. Make sure you research your approval odds as well before you begin the refinancing process.
How the Interest Rate Differential is Calculated
In Canada, an interest rate differential is calculated to determine how much it will cost you to break a fixed-rate mortgage early. The formula is Outstanding Balance x (your contract rate – current market rate) x time remaining in years. This will tell you exactly how much you need to pay off your mortgage.
What a Mortgage Discharge Fee Covers
A mortgage discharge fee covers any administrative charges from your lender for them to remove the lien, also known as their legal claim, from your property title. Once this registration discharge statement is complete, you’re then able to sell, refinance, or hold your title free and clear.
The cost of the mortgage fee differs depending on where you live. In British Columbia, the maximum that lenders can charge is $75, while in other parts of Canada, the average cost is between $200 and $400.
What’s important to understand is that this fee only covers the cost of the lender’s paperwork. Any legal fees and prepayment penalties for the remaining term length are not included in this cost.
Avoiding Penalties With a Portable Mortgage
Instead of breaking your mortgage with a new lender approval, you can choose to port your mortgage. However, you will need to meet the mortgage portability conditions in order to do so. If you qualify, you can avoid the fixed rate penalty or variable rate penalty that is found on your early payout statement, and not have to do an amortization reset.
Port and Top Up: If your new home is more expensive than your old home, you can choose to keep your existing mortgage at your current rate and then borrow any additional funds that you need at the new market rate. You then have a blended mortgage instead of a new one.
Port and Decrease: Even if you don’t have prepayment privileges, you can still keep your mortgage and decrease the amount when you move to a home with a smaller mortgage. You may just have to pay a partial prepayment penalty, but you won’t have any mortgage transfer fees or refinancing closing costs. If you have to pay a penalty based on the mortgage payout amount, you’ll get a penalty estimate using the prepayment penalty calculator and rate differential formula.
What is a Blend and Increase?
A blended and increased mortgage is the same as a port top-up mortgage, except for the fact that it can be used to refinance your mortgage early using a new posted rate. It can be cheaper than a renewal offer negotiation, and you don’t have to pay any accrued interest on any outstanding balance. When comparing a switch versus refinance with a break-even analysis, you could save a lot of money.
The main reason that people choose to refinance using this method as part of the mortgage renewal process is to do an equity takeout. It also avoids triggering any standard prepenalty rates and allows you to save money of financing while still meeting your financial goals.
When going with a blend and increasing the mortgage, both your mortgage maturity date and mortgage interest rates are going to matter. As part of this renewal process, your original mortgage amount and new amount are going to be combined, and a unified interest rate is going to be applied to your new total balance. This will all be defined on your mortgage commitment letter.
How Prepayment Privileges Reduce Penalties
If you have a closed mortgage in Canada, most lenders will have prepayment penalties as part of your mortgage agreement. These are payments that you can put down on the principal balance in order to pay your mortgage faster. Depending on your mortgage amount and the remaining balance, you can make frequent payments by increasing your monthly payments with your existing lender, or you can pay off a percentage of your balance annually, which can reduce your penalties if you choose to go through with the renewal process early.
Based on your last mortgage agreement and your new mortgage contract, using the full potential of your prepayment privileges can drastically reduce your penalty. This is especially the case if you use the full potential of 20% or whatever the maximum limit is. Another way to reduce the penalty or negate it is to wait as long as possible to pay it off or port the mortgage instead.
Depending on the mortgage that you have, you could also have a cash back mortgage clawback, as well as accrued interest.
Refinancing to Consolidate Debt at Renewal
In order to reduce your monthly expenses, there are renewal options available to consolidate your debt, which will reduce your existing rate on your debt to your renewal rate, which is going to be considerably lower.
If you choose to do this, you can access up to 80% of your home value minus your mortgage amount. Essentially, you’re combining a home equity loan with your mortgage product with no additional fees and different payment options. You can even choose to do this with a different lender, which can free up some extra cash.
When you’re looking to do this, it’s important to consider different mortgage types, the term length, other lenders offers, current market rates, and any legal fees that you might incur. Your maturity date on your current mortgage also makes a difference because you could incur penalties if you do so before your renewal time. Also, it might not be worth it if you’re refinancing at a higher rate.
Penalty Differences for Insured Vs. Uninsured Mortgages
While having a standard charge mortgage or collateral charge mortgage won’t really make a difference, whether your mortgage is insured or not, will. Insured mortgages often have higher penalties than uninsured mortgages, because many banks use higher posted rates in order to calculate them. Uninsured mortgages often have 3 month penalties or lower fees in general.
Variable Rate Three Months’ Interest Penalty
If you choose to break a closed variable rate mortgage, you will normally incur a flat rate of three months’ interest. This is a more straightforward payment than with fixed-rate mortgages.
Using a Prepayment Penalty Calculator
If you’re looking for a different mortgage solution to reduce your financial risk and get lower payments, first, it’s important to assess your risk tolerance and calculate your prepayment penalty. This can be done by answering a few questions with a prepayment penalty calculator. Whether you’re switching lenders or not, you will still have to pay this penalty. You can also call your bank to determine what the penalty will be.
When an Early Renewal Makes Financial Sense
When you consider a switch versus a penalty, when looking to do an early renewal on your mortgage, the most beneficial time to renew early is when interest rates are dropping. It could also be a good idea if you need to restructure your debt or have a major life change, like a change in your marital status. Your comparison rate will be a tool you can use to determine how much you will save.
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 and see if a second mortgage, a HELOC, or a home equity loan would be the right answer for you. Also, keep an eye on your credit score and your debt-to-income ratio. These factors will help you determine your overall odds of approval and whether it is worth breaking your mortgage.
Spring Financial can help you with any of these options. We offer mortgages, debt consolidation, home equity lines of credit, and combinations that can help with whatever you need. All you need to do is apply online, and one of our licensed agents will help you through the process. To make it as convenient for you as possible, everything can be done online, by phone, or even through text message. You can also contact us via live chat or by phone at 1-888-781-8439.
