Understanding Early Mortgage Renewals



Most homeowners are aware that mortgage renewals should be approached in the same way as applying for a mortgage. Savvy homeowners do not simply sign the renewal contract that their lender sends them in the mail. They understand the importance of researching their options and reviewing other lenders. They may also employ the services of a broker. In other words, many homeowners look at this time as an opportunity to re-evaluate their finances and options rather than blindly renew a contract. But there is one consideration that does not receive as much ink when talking about mortgage strategies - the early renewal.

Early mortgage renewals are when you choose to renew your mortgage earlier than the specified end date of the mortgage contract. This option offers a major advantage to homeowners who hold a mortgage with an interest rate higher than what is currently offered. In other words, it provides a homeowner the opportunity to switch from a high interest rate mortgage to a lower one.

This can be a great strategy to lower how much interest you pay on a mortgage almost instantaneously. There are two ways that early mortgage renewals can be accomplished. The first is by canceling your current contract, paying a penalty, and locking in at a lower rate for a new term. This can be advantageous if you are at the beginning of your current contract and interest rates suddenly plummet. Or, it might be more advantageous to blend the two contracts together for an overall lower interest rate.


To illustrate, let's say that you hold a current mortgage contract that is 6% for a five-year term. You are already half way through your term with 2 ½ years left. You look around and see that interest rates are at 3%. If you were to pay the penalty and walk away from your current contract, you would have paid 6% for 2 ½ years, then signed on for a new mortgage with a new extended term for 3%. Or, you could blend the two contracts. This would mean that your lender allowed you to change your interest rate from 6 to 3% halfway through the term. You would still have 2 ½ years left on the term and could avoid the penalty. Over the course of the five-year term, you would have paid an average (a 'blend') of 4.5% interest.

Early mortgage renewals are also dependent on the lender. Most large banks allow their mortgage holders to do an early renewal within 120 days of the expiry of their term. They will offer this without penalty. And if homeowners are seeking to blend rates, most financial institutions will accommodate their clients without penalty in order to hold on their business. But sometimes it is worth paying the penalty to break the contract and choose a new mortgage or lender.

As interest rates hit historically low rates, all homeowners should be using this opportunity to consider early mortgage renewals. This may mean canceling an existing mortgage contract to take advantage of a new rate and term. Or, it may mean staying with an existing lender and blending rates. Either way, the low rates should be on every homeowner's radar.

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