Jan 13

Does Renewing a Mortgage Early Cost or Save You Money?

A Look at the Potential Costs and Benefits of Early Mortgage Renewal

Mortgage renewals are a necessary part of homeownership. While some look at it as a routine process, like going to the dentist, others may want to get it out of the way as soon as possible—but is this the best approach?

Early renewals, or even auto-renewals, lock you into a new rate with your same lender, meaning you can miss out on huge savings and other opportunities with a different provider. In a relatively small window, the question remains, “Do early renewals save or cost homeowners money?”

Here’s a look at early mortgage renewals, along with the costs and benefits of renewing a mortgage early.

How Long Do You Have to Renew Your Mortgage?

You will have to renew your mortgage by the time your mortgage term ends if you still have a balance owing on your mortgage. Your lender will send you a mortgage renewal notice at least 21 days before the term is up. However, whether you decide to stay with your current lender or switch lenders for a better rate, you should be on the ball about this and make a decision within at least 30 days before your renewal date.

Should You Renew Early?

Lenders may allow you to renew your mortgage early, within 121 to 180 days prior to your renewal date, without penalty.

But don’t be alarmed if a lender does not offer you an early renewal rate. Not all lenders offer early renewals. Many lenders offer you a mortgage renewal approximately 4 months prior to your renewal date (120 days).

If your lender does offer early renewal, it’s important to note that this is not always the best option for most borrowers.

Lenders will typically only offer an early renewal in certain cases because most lenders only reserve rates for 120 days prior to the disbursement date. This means that if you want to look at other options and you are 180 days prior to your renewal date, it will trigger a penalty to switch to a different lender. Therefore, the existing lender hopes you simply sign the early renewal and move on, without having any competition on their end.

The only time an early renewal is beneficial for borrowers is when you are in a rate increasing environment. That’s because the existing lender is essentially saying, ‘’I will renew your mortgage right now at a current rate before rates go up.” Whereas, if you want to get a current rate with any other lender right now, you will have to pay a penalty to break the contract with the existing lender.

However, unless the rate increasing environment is drastic, it’s in the best interest of the borrower to see what other lenders can offer. This means you should review renewal options within 120 days of the renewal date. This way, the existing lender and all other lenders can compete for your business.

Consider Your Circumstances

Since you signed your last mortgage agreement, your life has probably changed in one or more ways. So when renewing your mortgage, it’s important to find a mortgage product that suits your current financial situation, lifestyle, and goals.

Income

Has your income changed—e.g. promotion and raise, loss of income, or retirement? Depending on the change in your income, you may be willing to pay off your mortgage faster with higher and more frequent payments.

Or, you might want to lower your monthly mortgage payments if your income is lower.

However, if you want to renew and lower your payments, you will need to extend your amortization. For example, if you have 20 years remaining on your mortgage, perhaps you choose to re-extend it to 25 years. For you to do that though, you will need to refinance. If you do a straight renewal or switch to a different lender, you must keep the exact amortization remaining.

Expenses

Do you have more or less monthly expenses than before? Your monthly expenses will affect what you can afford for mortgage payments.

Financial Risk

Are you willing to take more or less of a financial risk than before? If you’re willing to take a risk, you may opt for a variable-rate mortgage with an interest rate that tends to be lower than a fixed interest rate but fluctuates with the market.

Or, if you want to play it safe, you can choose a fixed-rate mortgage with an interest rate that tends to be higher than a variable rate but stays the same for the duration of your mortgage term.

Marital Status

Has your marital status recently changed? Are you married or in a common-law relationship now? Or have you divorced or separated? If you have a dual-income household, you may wish to pay off your mortgage faster with larger and more frequent payments.

Financial Goals or Milestones

Your short-term and long-term financial goals may have changed in the last few years. If so, this will affect the type of mortgage product you’ll need.

For example, if you are planning to start a family, want to pay for home renovations, or pay for your child’s tuition, you may want to tap into your home equity to meet your current financial goals.

How the Mortgage Stress Test Applies

Federally-regulated financial institutions use the mortgage stress test to determine if borrowers can afford their mortgages in the current market and if interest rates increase. If you decide to renew your mortgage with a new federally-regulated lender, you will be subject to the mortgage stress test.

You will need to prove that you can afford payments at a qualifying interest rate that is usually higher than your actual mortgage rate. And if you don’t qualify, then you will either have to stick with your current lender or switch to a lender that isn’t required to use the mortgage stress test, such as a private lender.

Should You Accept the Auto-Renewal Mortgage Rate from Your Lender?

Since your lender’s first offer is rarely the best offer available, you shouldn’t accept the auto-renewal mortgage rate without shopping around first. And you should only accept it if the auto-renewal rate is one of the best available. Otherwise, you’re better off trying to negotiate a better rate with your lender or switching lenders for a better rate.

Benefits of An Early Renewal

If you’re concerned that interest rates will increase, locking in a low-interest rate early on will help reduce the risk of having a higher interest rate when your mortgage term is up. But the benefit of early renewal depends greatly on the rate being offered. If the renewal rate is lower than your current rate or the anticipated future rate, renewing early can potentially help you save money.

Drawbacks of An Early Renewal

Locking in a mortgage rate early may come at a cost, such as an extra 0.10 to 0.30 of a percentage point on your new locked-in interest rate. And if interest rates end up dropping before your mortgage term is up, then locking in a rate early on could mean missing out on better rates.

Early renewal may also come with a penalty of breaking your mortgage term early. This penalty is usually three months’ interest at your current rate or the interest rate differential—which is calculated using the current rate, the new rate, and the remaining months left in your mortgage term.

Explore Your Options

Since you don’t have to stick with the same lender for your mortgage renewal, it’s worth shopping around and exploring your options starting four months (120 days) before the end of your mortgage term. When shopping around and weighing your options, you can find the best mortgage product to help you save money and complete the paperwork in time to switch lenders on your mortgage renewal date.

Contact A Broker for Professional Guidance

Even if you decide to negotiate with your current lender, you likely won’t get the best mortgage rate available. But a mortgage broker can help with your mortgage renewal and let you know if renewing your mortgage early will save you money. They will find the best rates and mortgage products, negotiate for you, and handle the paperwork for your mortgage loan application.

The Bottom Line

When deciding on an early mortgage renewal, it’s important to weigh the options, costs, and benefits to see if it’s worth it. And a mortgage broker can help make this easier, finding the best mortgage product for your financial situation, lifestyle, and future goals.

The Chris Allard Team