Your mortgage renewal is on the horizon, but did you know that renewing early could be a strategic move to capitalise on lower interest rates? In this guide, we will explore the concept of early mortgage renewal, shedding light on its benefits, potential pitfalls, and how it compares to mortgage refinancing. Learn how seizing the opportunity to renew before term expiration can optimise your budget and lead to substantial savings.

What Does Early Mortgage Renewal Mean?

When you secure a mortgage to purchase a property, it comes with a predetermined term known as the mortgage term. As this term concludes, you are faced with a decision: either renew your mortgage or pay off the remaining balance. Early mortgage renewal occurs when you renew your mortgage before the scheduled term expiration. During this period, fluctuations in prevailing interest rates may present an opportunity for you to secure a lower rate. Additionally, you can alter the length of your new term, allowing for a customised approach to match your financial goals.

For instance, you could opt for a 3-year term instead of committing to a standard 5-year period. However, it’s essential to exercise caution regarding penalties. Most lenders permit penalty-free renewals up to 6 months before the term ends. Beyond this window, certain fees may apply. Calculating the difference between penalties and potential interest savings from a new mortgage rate is crucial in making an informed decision. Generally, the closer you are to maturity, the higher the penalty.

To visualise various borrowing scenarios, try out a mortgage payment calculator for accurate estimations.

What Does Mortgage Refinancing Mean?

Before we explore the meaning of mortgage refinancing, we must first understand what early refinancing is. While early mortgage renewal offers an avenue for adjusting your mortgage terms, mortgage refinancing takes it further. Refinancing allows renegotiating various terms and conditions, offering more flexibility than a pre-term renewal. One significant aspect of refinancing is the ability to renegotiate the amortisation period. This allows you to tailor the length of your loan, potentially reducing monthly payments. Furthermore, refinancing enables you to revisit your loan amount, providing access to a portion of your home’s net worth—the difference between its current market value and the remaining mortgage balance.

This unlocked equity can be harnessed for home renovations, debt consolidation, or investments, all while securing a more favourable interest rate. It’s crucial to note that refinancing may incur additional costs, including prepayment fees. Refinancing involves a new loan application; some fees, like a property value assessment, may also apply.

Reasons to Renew The Mortgage Early?

Following are some of the reasons to consider mortgage refinancing. 

Change in Interest Rates

One of the primary reasons to consider early mortgage renewal is the fluctuation in interest rates. Picture this: the Bank of Canada adjusts the policy interest rate, leading to a drop in mortgage interest rates. You lock in a new, lower rate by seizing the opportunity to renew early. The benefits? Immediate reduction in mortgage payments and overall borrowing costs until the end of your mortgage term.

Anticipating Rate Increases

Timing is everything. If the forecast predicts an impending interest rate hike, an early mortgage renewal could protect you against higher rates. Acting before the rate increase allows you to secure a lower rate, shielding your budget from unwelcome surprises.

Pro Tip: The Bank of Canada adjusts the key interest rate up to eight times a year on predefined dates, making it crucial to stay informed.

Life Changes

Life events, such as a divorce, a job change, or significant shifts in family dynamics, present opportunities to reassess your financial strategy. Early mortgage renewal allows you to align your mortgage terms with your current situation, ensuring financial stability during transitions. Did you know that adding or removing someone from your mortgage necessitates a refinance, which involves evaluating your credit report?

Moving On

If you decide to sell your current home and purchase a new property, transferring your mortgage (in part or entirely) can be a savvy move. Not only does it streamline the process, but it also helps minimise the costs associated with breaking your mortgage before maturity.

An Early Renewal Offer: To Accept or Not to Accept?

An Early Renewal Offer: To Accept or Not to Accept

Receiving an early renewal offer from your lender is a hassle-free way to continue your mortgage journey. However, the convenience comes at a potential cost—often, a higher interest rate than what could be secured through market exploration.

Should You Accept

In most cases, blindly accepting your lender’s offer might not be in your best interest. Lenders seldom present their most competitive rates upfront. The key is to be proactive and explore your options before committing. Sending your early renewal offer to Nesto allows us to compare alternatives, ensuring you make an informed decision that aligns with your financial goals.

Pro Tips for Fetching The Best Early Renewal Rates

Some tips for getting the best mortgage renewal rates are discussed below.

    • Start Early: Initiate the renewal process within the last four months of your current mortgage term. This gives you ample time to explore competitive rates and seamlessly transition to a new lender if necessary.
    • Market Timing: Monitor market trends. If interest rates are increasing, consider securing an early renewal to lock in a more favourable rate.
    • Explore Options: Treat the early renewal process like securing your original mortgage. Evaluate the interest rate and consider the terms and features that align with your financial goals.
    • Professional Assistance: Consider engaging mortgage experts like Nesto to navigate the complexities of the mortgage market. They can help you find the best mortgage product and rate tailored to your unique needs.

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Frequently Asked Questions (FAQs

Can an early mortgage renewal get me a better rate?

An early mortgage renewal can lead to a better rate, especially when market conditions indicate an upward trend in interest rates.

Can I change the terms of my mortgage with an early renewal?

Absolutely. Early renewal is an opportunity to negotiate new terms for your mortgage, including adjusting the terms and features and securing a more favourable interest rate.

Will I break my mortgage if I accept an early renewal offer?

Accepting an early renewal offer doesn't mean breaking your mortgage. There won't be a penalty if you keep your current mortgage until the last 120 days of your term.

What is the prepayment penalty for breaking my contract?

You won't incur a prepayment penalty for early renewal, specifically up to 120 days before your current mortgage term expires.