Renewing and renegotiating your mortgage

Table of contents

Renegotiating your mortgage agreement: breaking your contract 

During your mortgage term, you may find that your current mortgage no longer meets your needs. It’s also possible that interest rates might have gone down.

These are some of the reasons you might want to renegotiate your mortgage agreement—in other words, change the conditions of your current mortgage.
 
Before you do, you need to determine whether renegotiating your mortgage is worth the potential costs. 

Breaking your mortgage agreement

Different mortgage lenders offer different terms and conditions. If you have a closed mortgage, your financial institution may or may not allow you to break your mortgage agreement. Read your mortgage contract or ask your mortgage lender if it’s possible.
 
If the financial institution does allow you to break your closed mortgage agreement, it will generally require you to pay a prepayment charge, which could cost you thousands of dollars. For more information, see the section below on prepayment charges.
 
Usually, you must pay any prepayment charge yourself. However, if you want to break your existing mortgage but plan to arrange a new one with the same financial institution, ask if your lender will reduce the prepayment charge. See if you can use your prepayment privileges to reduce your mortgage balance, as this may result in a lower charge. Be aware that some lenders have restrictions on how close to the date of renegotiation you can make prepayments. For example, a lender may not allow any prepayments within 30 days of the date you intend to discharge and pay off your mortgage.
 

In addition to a prepayment charge, there may be some fees to break your mortgage. Your financial institution or the new lender may be willing to waive or pay part or all of these fees if you ask it to do so.

Before breaking your mortgage agreement, find out whether you will have to pay: 

  • a prepayment charge and what that amount is
  • an administration fee
  • an appraisal fee
  • a reinvestment fee
  • legal and registration fees to discharge the old mortgage and register the new one.

You may also have to repay some or all of any “cash back” you may have received when you first obtained the mortgage.

Prepayment charges

The two methods commonly used to calculate a prepayment charge are the following:

  • three months’ interest: an amount equal to three months’ interest on your outstanding mortgage balance
  • interest rate differential (IRD): an amount based on the difference between your interest rate and the rate for a mortgage that is closest to the remainder of your term, multiplied by the outstanding balance of your mortgage for the time left on your term. It is calculated on the amount you want to prepay. To determine the comparison rate and the time left on your term, the lender may round the term up or down.

Mortgage contracts often state that the prepayment charge will be the greater amount of these two calculations. 

Example: Prepayment charge
 
Jim is considering breaking his mortgage to take advantage of lower rates currently being offered. He wants to estimate how much his prepayment charge would be.
  • Outstanding mortgage balance: $200,000
  • Annual interest rate: 6%
  • Number of months left in term: 36 months (or three years) left in a five-year term
  • Today’s interest rate for a term of the same length: Jim’s lender is offering a 4% interest rate for a mortgage with a 36-month term.

Jim’s mortgage agreement states that the charge would be calculated using the interest rate differential method.

The lender calculates Jim’s prepayment charge to be $12,000.

When Jim is deciding whether to renegotiate his mortgage agreement and pay this charge, he should consider:
  • whether he would be better off using the money to make a lump-sum prepayment if his mortgage contract allows him to do so
  • whether he really is going to save any money after paying the charge.
 
 

How to find out about prepayment charges

Federally regulated financial institutions, such as banks and most trust companies, must briefly outline mortgage prepayment privileges and charges in an information box at the beginning of your mortgage agreement or in a disclosure statement. Your mortgage agreement also contains detailed information about any prepayment privileges and charges that could apply.

To estimate how much your charge will be, read your mortgage agreement or contact your mortgage lender. Keep in mind that the amount of the charge can change from day to day because it is based on factors that change, such as today’s interest rates, the outstanding balance left on your mortgage, and the amount of time left in the mortgage term. However, the estimated amount that your lender gives you should be close to the actual charge.
 
Some financial institutions have also agreed to provide additional information on prepayments under a Voluntary Code of Conduct. As of May 2013, banks that are members of the Canadian Bankers Association have agreed to comply with this Code.
 
Lenders following the Code have agreed to provide information that includes (but is not limited to):
  • information to help you understand the factors that can affect a prepayment charge so that you can make informed decisions. It should cover the following topics: Lenders may make this information available to you online or upon request at their places of business in Canada.
  • online financial calculators to help you estimate a prepayment charge that could apply if you pay off your mortgage in full or prepay more than your prepayment privileges allow.
  • toll-free telephone access to knowledgeable staff who can tell you the actual prepayment charge that would apply at the time of your call. You can also ask for a written statement with the amount of the charge.
  • an annual statement that sets out your prepayment privileges and how the lender would calculate a charge, as well as information about your mortgage that you can use to estimate a charge, among other details.
  • a written statement if you confirm you will be making a prepayment that will result in a prepayment charge. Among other details, it must include the actual prepayment charge amount. 

For full details on the information to be provided under the Voluntary Code of Conduct, see Mortgage prepayment: Your rights and responsibilities.

Tips on reducing prepayment charges

Many mortgage agreements offer prepayment privileges that allow you to prepay a certain amount without triggering a prepayment charge. If you can do so, you may want to prepay a portion of your mortgage before you renegotiate it. Your charge would then be calculated on the smaller balance left to pay.
 
Remember that some lenders have restrictions on how close to the date of renegotiation you can make prepayments.
 

If you move, you may also be able to avoid paying prepayment charges by “porting” your mortgage, meaning you may be able to take your existing interest rate and terms and conditions with you to your new home.

Adding a prepayment charge to your mortgage

Some lenders may provide the option of adding your prepayment charge to your outstanding mortgage balance if you renegotiate your mortgage. This will increase the amount of interest you will have to pay over the life of your mortgage.

For example, it would cost you an additional $3,004 in interest charges to add a $6,000 prepayment charge to a mortgage balance of $200,000, assuming a constant interest rate of 4% with monthly payments over a 22-year amortization period.
 
For more information on prepayment charges, see Mortgage prepayment: Know your options.

Blend-and-extend option

Some mortgage lenders may allow you to extend the length of your mortgage before the end of your term. They do this by blending your old interest rate and the new term’s rate. This is called the “blend-and-extend” early renewal option.
 
A “blend-and-extend” option may trigger a prepayment charge. Your mortgage lender may also charge an administrative fee to use this option.
 

Example: Blend-and-extend option calculation 

​New interest​ rate = (A x B) + [(C x (D – B)]
D
   

A: interest rate of your existing mortgage term
B: remaining months in the existing term
C: today’s interest rate for the new term
D: number of months in the new term 

Note: This method of calculating the blended rate has been simplified for illustration purposes and does not factor in any prepayment charges which may also be blended into the new rate or paid at the time of renegotiation. Contact your financial institution for their exact blended rate.

Example

Linda is considering breaking her mortgage contract to renegotiate a new mortgage with her existing lender, Lender X.

Assumptions

  • Mortgage balance: $200,000
  • Remaining amortization: 22 years
  • Existing term: 5 years
  • Months left in term: 24
  • Payment frequency: monthly
  • Existing interest rate: 5.5%
  • Today’s interest rate for a 5-year term from current lender: 4.0%
  • Blend-and-extend interest rate: 4.6%

Prepayment charge to break mortgage: $6,000

If Linda decides to renegotiate a new mortgage at an interest rate of 4.0% with her existing lender, she will pay $36,701 in interest for a new five-year term. She will also have to pay a prepayment charge of $6,000 for breaking her mortgage contract.

When the interest and the prepayment charge are combined, Linda’s total cost would be $42,701.

Note: In this example, Linda pays her $6,000 prepayment charge at the time she breaks her mortgage contract. If she added the charge amount to a new mortgage, it would increase the amount of interest she would have to pay.

Linda decides to compare this to her other options, which include using her lender’s blend-and-extend option and shopping around with different lenders. 

Scenario 1: Blend-and-extend with existing lender (at 4.6% interest rate)

If Linda decides to use her lender’s blend-and-extend option, her new mortgage rate would be as follows:

Blend-and-extend calculation

 

(5.5% x 24 months) + [(4.0% x (60 months – 24 months)]
60 months

(5.5% x 24 months) + [4.0% x 36 months]
60 months​
(132 + 144)%
60​
 = 4.6%
A: 5.5% (interest rate for existing term)
B: 24 (number of months left in the existing term)
C: 4.0% (interest rate currently available for a 5-year term)
D: 60 (number of months in a 5-year term)

 

If Linda chooses the blend-and-extend option, her mortgage rate will be 4.6% for the next 60 months.

She will pay $42,367 in interest over the next five years. 

Scenario 2: Renegotiating with Lender Y (at 3.75% interest rate)

Interest rate offered by Lender Y 3.75%
Interest charges for new five-year term, plus prepayment charge due to Lender X Interest charges: $34,350
Prepayment charge: + $6,000
Total: $40,350
Savings compared to blend-and-extend option $2,017

 Scenario 3: Renegotiating with Lender Z (at 3.5% interest rate)

Interest rate offered by Lender Z 3.5%
Interest charges for new five-year term, plus prepayment charge due to Lender X Interest charges: $32,005
Prepayment charge: + $6,000
Total: $38,005
Savings compared to blend-and-extend option $4,362
 
 
Important: in the examples above, the savings to renegotiate Linda’s mortgage with a new lender do not take into account any fees required to set up the new mortgage.

Unless your new lender is willing to pay some or all of these fees, they will reduce any potential savings you might be able to achieve by renegotiating for a lower interest rate. 
 

To find the option that best suits her needs, Linda will need to consider all the costs involved, including any prepayment charge and fees that could apply.

Weighing the benefits and risks

When interest rates fall, it may be tempting to break your existing mortgage and renegotiate a new one at a lower interest rate, or to “blend-and-extend.” Before you do that, it is important to weigh the benefits and risks.

Benefits

  • You get a lower rate and potentially lower payments.
  • If you keep the payment the same as with your current agreement, you will be able to pay off your mortgage sooner.
  • You can lock in the lower interest rate for the new term of the mortgage.

Risks

  • If there are fees or a prepayment charge, the costs could be more than any savings that you might get.
  • If you are planning to sell your home soon, you may not be able to realize any savings from renegotiating for a lower interest rate.
  • The interest rates may continue to go down, in which case you would not lock your new mortgage in at the lowest rate possible.
 

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