*This post was created in collaboration with Mortgage Maestro.
If you have a mortgage, odds are you’re tied to it for a few decades, depending on the length of your amortization period. But if your financial situation has improved since you initially took out your mortgage, you might have the opportunity to pay down your loan balance in full at the time of renewal.
The question is, is this possible? And if so, should you pay it off in full at that time?
Let’s take a look at some considerations to make before deciding whether or not to pay off your mortgage when the term comes to an end.
Key Points
- A mortgage renewal involves renegotiating the terms of your existing mortgage loan at the end of its term for a new term and interest rate.
- You have the option to pay off your entire remaining mortgage balance at the end of the term.
- Be wary of prepayment penalties, though, especially if you have a closed mortgage.
- If prepayment charges apply, they may either be 3 months’ worth of interest or the interest rate differential, whichever of the two is greater.
What Is A Mortgage Renewal?
A mortgage renewal involves a new agreement to renew a mortgage term with your lender. You’ll receive a notification that your mortgage term is nearing its end within a month or so.
The lender will outline the new term, including the interest rate, if you decide to renew. This gives you enough time to decide whether or not to renew your mortgage, switch to a different lender, or pay off your mortgage altogether.
| Pro Tip: You don’t have to wait for the mortgage term to end before renewing your mortgage. Instead, you can renew your term as early as 120 to 180 days before your current mortgage term expires. |
Learn more: A Guide To Mortgage Renewals In Canada
Can You Pay Off A Mortgage At Renewal?
Yes, you can choose to make a final payment to pay off your full outstanding mortgage balance when the term ends. However, you will need to follow a specific process to avoid prepayment penalty fees:
- Mortgage Discharge: Once you make a lump sum payment to fully repay your home loan, the mortgage must then be discharged. To do this, your lender will issue you written confirmation that you paid off your mortgage. Then, a real estate lawyer will supply this confirmation to the land registry office in your municipality.
- Updated Title: The property’s title will be updated to remove your lender’s name and interest in the ownership of the property. At this point, the mortgage will be discharged, and you’ll no longer be obligated to make any mortgage payments.
| Avoid Penalties With Proper Timing The timing is very precise when it comes to paying off your mortgage and having it discharged. This allows you to avoid any limitations of the previous loan term that could hold you accountable for early repayment penalty fees. If you repay your mortgage before this time, you will likely be faced with penalties, which could cost you thousands of dollars |
Mortgage Prepayment Penalties For Renewal
If you pay off your mortgage at the time of renewal, you might need to pay an early repayment penalty. The amount you have to pay will depend on a few things, including the lender you work with.
Penalties are charged on closed mortgages, while open mortgages will not incur these penalties. The penalties for paying your mortgage off early with each of the big banks in Canada — including RBC, BMO, Scotiabank, TD Bank, and CIBC — are as follows:
Closed Fixed-Rate Mortgage
The prepayment fee will be the higher of 3 months’ worth of interest or the interest rate differential, the latter of which is the difference between the outstanding balance owed at the time of the prepayment and the principal you would owe based on the posted rate for a similar mortgage, less any rate discount received.
Closed Variable-Rate Mortgage
The prepayment charge is 3 months’ worth of interest.
How To Avoid Mortgage Prepayment Penalties
Paying off your mortgage early can cost you a few thousand dollars in prepayment fees, depending on your outstanding balance, the interest rate, the number of months left in the term, and the current posted interest rate.
To avoid paying these penalty fees, there are a few things you can do:
Use The Allowable Prepayments To Pay Off Your Mortgage Sooner
Instead of paying off your mortgage in full when you renew it, look into what options are available to you as per your loan contract as far as making prepayments goes without being penalized. Options may include the following:
- Choose A Shorter Loan Term: For instance, rather than choosing a 5-year term, perhaps a 3-year term might be better. This allows you to boost your regular mortgage payments and avoid paying penalties.
- Make Lump-Sum Payments: Lenders typically allow borrowers to make a lump-sum payment to put toward the original principal amount once a year. The amount usually varies from 10% to 20% of the original principal amount.
- Make More Frequent or Higher Payments: Rather than paying monthly mortgage payments, you can speed up the process by switching to a more frequent payment schedule, such as semi-monthly, bi-weekly, or weekly. This will increase your payments and reduce the amount of interest you pay over time.
Take Your Time Paying Off Your Loan
If you have a low interest rate, you may be better off taking your time repaying your mortgage rather than getting stuck with prepayment penalties when you repay your mortgage in full.
Should You Pay Off Your Mortgage At Renewal?
Whether you choose to repay your mortgage in full by the time it’s up for renewal depends on your situation.
When You Should Pay Off Your Mortgage At Renewal
Consider paying off your home loan if any of the following apply:
- Rates Are Higher: If renewal rates are much higher than what you’re currently paying, it might be worth paying off your loan (if you can) to save yourself all that extra interest cost. By the same token, if renewal rates are much higher than the returns you’re earning on savings or investments, getting rid of your mortgage balance can cut interest expenses and provide a better financial benefit.
- You Have The Financial Means: It makes sense to pay off the mortgage only if you can do so without draining your emergency funds or leaving yourself short covering other essential expenses.
- You’re Approaching Retirement: Becoming mortgage-free before retirement can take the pressure off your monthly cash flow and reduce financial stress, especially if you’re living on a fixed income.
When You Shouldn’t Pay Off Your Mortgage At Renewal
In the following scenarios, paying off your mortgage at renewal might not make sense:
- You’ll Deplete Your Savings: If paying off your mortgage would wipe out your cash reserves, it’s better to keep those funds available and keep paying a mortgage. Having funds available for emergencies is often better than being debt-free.
- You’re Getting Better Returns Elsewhere: When your mortgage rate is relatively low but you can consistently earn higher returns elsewhere, keeping the mortgage and investing the extra money may be more profitable.
- You Have Other High-Priority Debts: High-interest debts like credit cards, personal loans, or lines of credit should be covered first, since they cost significantly more than most mortgages.
What Can You Do Instead Of Paying Off Your Mortgage At Renewal?
While paying your loan off in full is an option at the time of renewal, you have a couple of other options.
Switch Lenders
Switching lenders at renewal can be a smart move because it allows you to shop around for lower rates or better terms without penalty. This can be especially helpful if you’re not happy with your current lender, or you’re able to find a better deal elsewhere.
As mentioned, you have the option to change lenders at the time of renewal, but should you? There are times when switching makes sense, but there are scenarios when it might not.
| When you Should Make The Switch | When You Should Stick With Your Current Lender |
| – You find lower interest rates that can save you thousands over time – Another institution offers more flexible repayment options, longer amortization, or better payment schedules – Your credit improved or income increased, qualifying you for stronger terms elsewhere – You’re not satisfied with your current lender’s service or fees | – Fees are high when switching – Your financial profile has weakened – Your mortgage is nearly paid off – You’re happy with your existing term |
| Not Happy With Your Current Lender? Make The Switch If you’re not sure who you want to renew your mortgage with, consider using a mortgage broker like Mortgage Maestro. They will assess your financial situation and provide you with a list of lenders and offers that best meet your needs. Moreover, they offer very competitive rates due to their large network of lenders. |
Refinancing
Refinancing can be a good option because it allows you to secure a lower interest rate or better terms without depleting your savings. It can also free up cash flow by extending the amortization period or consolidating other debts.
The question is, how much different is renewing versus refinancing? Let’s compare:
| Renewing | Refinancing | |
| Fees | None | – Discharge fees – Registration fees – Assignment fees – Appraisal fees – Administration fees – Early prepayment fees |
| Mortgage Interest Rates | Little room for negotiating | Flexibility to comparison shop for the lowest rates |
| Mortgage Term | No room for negotiating | Flexibility to choose any term |
| Mortgage Amount | Outstanding balance carries over to the new term | Refinance for a new mortgage loan amount |
| Documentation | Sign the renewal contract | In-depth mortgage application |
Find The Best Mortgage For Your Needs
| Amount | Rate | Availability | Products | |
 Loans Canada | Varies | Varies | All of Canada | - First mortgage - Refinancing - Renewal - Lender switch - Home equity loans |
 Alpine Credits | $10,000+ | Based on equity | All of Canada except Quebec | - Home equity loans |
 Mortgage Maestro | $10,000+ | 5.19%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal - Line of credit (HELOC) - Reverse mortgage |
 Neo Mortage™ | Varies | 5.54%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal |
 nesto | $100,000+ | 5.34%+ | All of Canada | - First mortgage - Refinancing - Renewal |
 Homewise | Varies | Varies | BC, AB, MB ON | - First mortgage - Refinancing - Renewal - Lender switch |
How Will My Credit Score Be Affected At Renewal?
Whether your credit score is affected when you renew your mortgage depends on whether you stay with your current lender or switch to a new one.
- Renewing With The Same Lender: Your lender typically won’t perform a hard credit check, so your credit score won’t be affected. Unless you’re making major changes (like refinancing), you won’t need to submit new financial documents.
- Switching To A New Lender: A new lender may perform a hard inquiry to assess your creditworthiness, which can cause a temporary dip in your credit score.
Final Thoughts
It’s certainly possible to fully repay your mortgage at renewal, but you might want to look at other options, such as making lump sum payments towards your principal. You’ll also want to consider the costs associated with paying your mortgage off early. Further, consider whether to renew with your current lender, or make the switch to a new one.
