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Should You Pay Off Mortgage at Renewal?

Here are some tips and tricks to understand what you should do at renewal time.

You’ll need to keep in mind two critical lengths of time when you have a mortgage in Canada. The first is your amortization period, the total length of time before your mortgage is completely paid off. 

Amortizations in Canada are usually between 20 and 30 years for first-time buyers. 

The other length of time you’ll need to keep in mind is the term. Your mortgage term is shorter than the amortization period and represents the length of time your current mortgage rate is locked in with your current lender. For example, a common mortgage term is a 5-year fixed, which means you will pay a fixed mortgage interest rate for five years. It’s common for Canadians to have several terms over the entire amortization period of their mortgage.

At the end of the term, you have a few options. You can renew with your current lender, you can shop around and switch to a new lender, or you can pay your mortgage off entirely.

The third option, paying off your mortgage entirely, is less common because few Canadians have access to enough money to pay off the remaining balance of their mortgage in one lump sum payment. But it does happen, especially for Canadians who receive unexpected windfall cash. So is paying off your mortgage at renewal the right choice for you?

Let us help you determine which rate best suits your individual needs by answering a few short questions about your home and financial history.

What is mortgage renewal?

Mortgage renewal is the process of agreeing on a new mortgage term with your lender. Usually, about 21 days before your current mortgage term expires, you’ll receive a renewal letter from your lender outlining your new mortgage term, including the interest rate that you’ll receive if you choose to renew. Your mortgage renewal letter simplifies the process of renewing. Just accept the terms and your mortgage renews for another period.

That said, you can renew your mortgage much earlier than 21 days before your term expires. Most lenders in Canada allow you to renew your mortgage term between 120 and 180 days before your current term expires. 

Here is how early you can renew for each major lender in Canada:

  • TD – 120 days
  • Scotiabank – 180 days
  • RBC – 120 days
  • CIBC – 150 days
  • BMO – 180 days

Prepayment Penalties

If you’re considering paying off your mortgage at renewal instead of committing to another term, you’ll need to consider prepayment penalties. A prepayment penalty is a fee you’ll pay to break your mortgage term and pay off your mortgage. You’ll also pay a prepayment penalty when refinancing your mortgage.

Usually, the closer you are to the end of your term, the smaller your prepayment penalty is. Still, it would be best to calculate your exact prepayment penalty because it could be in the thousands or tens of thousands of dollars, depending on various factors.

If you aren’t ready to pay the penalty to be mortgage-free, now might not be the best time to pay off your mortgage. 

Here are the prepayment calculators for each primary lender in Canada. If your lender isn’t on this list, you can call them and ask for your prepayment penalty. You can also use our mortgage penalty calculator

Transferring to Another Provider

If you don’t want to renew your term with your current lender, you can also refinance your mortgage with another provider. When you refinance your mortgage, you are essentially taking out a new mortgage with a new lender and using that money to pay off your old mortgage with your old lender.

Refinancing has the benefit of helping you secure the lowest possible mortgage rate and allows you to apply for a larger mortgage than what you hold with your current lender, as long as you have sufficient equity in your home to do so. The extra money from the larger mortgage would be advanced to you as cash, which you can spend on home improvements, post-secondary education, debt consolidation, and more.

The downside of refinancing is that it is an entirely new mortgage with a new provider, and the mortgage application process is demanding. You’ll also pay extra fees, including:

  • Setup fees with the new lender
  • Fees to discharge your old mortgage and register your new mortgage
  • Transfer or assignment fees from your current lender
  • Appraisal fees to confirm the value of your property
  • Administration fees
  • Prepayment penalties

In some cases, your new lender will cover some of the costs to refinance.

Find the best rate for you

Mortgage rates vary depending on things like your down payment, home price, and whether you’re buying or refinancing. Get a tailored quote in less than 2 minutes.

Renewing Your Mortgage vs. Refinancing

Renewing your mortgage is the easiest route, but you might not get the most competitive interest rate. On the other hand, refinancing your mortgage is more work but ensures you have access to the lowest possible interest rates. Here’s a quick comparison.

 

Renewing

Refinancing

Paperwork

Sign your renewal slip

Extensive mortgage application including proof of income and financial disclosure

Fees

No fees

Setup, discharge, register, transfer, appraisal, administration, and prepayment fees

Mortgage rates

Little room to negotiate the best mortgage rates

The freedom to shop for the best mortgage rates

Mortgage term

No room to negotiate

Freedom to choose any mortgage term

Mortgage amount

Outstanding balance carries forward into the new term

Option to refinance for a higher mortgage balance

 

What happens when you pay off your mortgage in Canada?

If you’ve calculated your prepayment penalty and you have the cash to pay off your mortgage, congratulations. Becoming mortgage-free is a significant milestone.

You’ll need to make a lump-sum payment and then go through the process of discharging your mortgage. This process usually requires a real estate lawyer. First, your lender will send you confirmation that you paid your mortgage in full. In some cases, you’ll need to make a special request for this confirmation. Your lawyer will then provide this confirmation to your local land registry office so that they may update your property’s title and remove your lender’s interest in your property from the title. Once the land registry updates your property’s title, your mortgage is officially discharged, and you are mortgage-free.

The Bottom Line

While it is possible to pay off your mortgage at renewal, consider whether your lump sum of money could be put to better use. For example, in today’s low-interest-rate environment, your lump sum of cash may serve you better if you invest it in the stock market or use it to pay off high-interest debt. 

That said, if you’re dreaming of the day when you no longer need to make mortgage payments, paying off your mortgage at renewal is possible and good use of your money.

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