Renewing a mortgage early usually happens when you want to take advantage of lower interest rates or you want to switch to a variable rate from a fixed. Also a lot of financial savvy people will also purposely switch in the middle of their term simply to extent the low rates that they have. If you have a variable rate and want to switch to a fixed and your current bank is not offering you a competitive rate, this is definitely a time to do a switch. A family that plans on having a baby will also use this plan to secure low payments for a longer term, especially if they are going to lose an income if someone decides to stay home and look after the baby. If you plan on getting pregnant and have a mortgage, plan wisely.
There are costs involved with switching early. You will most definitely have at least a three month interest penalty. Banks are even approaching their clients 6 to 8 months before their renewal is up and asking them to renew early and not even offering to waive the penalty. The penalty may also be more than three months if you have a high interest rate than what is being offered at the time you are looking to switch. In which case it will be an IRD penalty, interest rate differential. This is the amount of money that the bank loses if you break your mortgage early. If you have 18 months left on your mortgage and you have a 5% interest rate and the current rate is 4% you will be charged 1% on the remaining 18 months which will work out to around $3,000. Depending on the size of the penalty and your long term savings or piece of mind will determine if you should renew early. There is also a discharge fee or around $250 to release your current lenders charge from title. If you do decide you wish to renew early call your bank and ask if they will waive all penalties and fees. If they won't? Because they can. That is when you call me. Why stay with them if they aren't looking after you?
These fees bring to the purpose of this post. Some lenders will allow you to cap your mortgage to avoid having to pay these fees out of pocket. Simply add the penalty on top of your current mortgage without having to refinance when you switch, "cap your mortgage". The few lenders that allow this, do it for one simple reason, to get more business. Because lenders allow the cap, it saves the additional costs of having to get a lawyer and it saves you from having to pay up front for your penalty and discharge fees. There is limitations to how much you can cap, so contact me to see how it will work for you.
If you have any questions please do not hesitate to contact me or leave a comment.