When Should You Renew Your Mortgage Early?

Watching interest rates drop and wondering if you should break your current mortgage to get a better rate? This guide helps you make that decision with real numbers so you can determine whether the penalty is worth the savings.

Why Consider Early Renewal?

Early renewal means breaking your current mortgage before the term ends to lock in a new rate. This makes sense when:

• Interest rates have dropped significantly since you signed
• Your current rate is much higher than available rates
• The interest savings outweigh the penalty

Understanding Mortgage Penalties

When you break a mortgage early, you'll pay a penalty. The calculation depends on your mortgage type:

Variable Rate Mortgages:

• Typically 3 months' interest
• Relatively straightforward to calculate

Fixed Rate Mortgages:

• Greater of: 3 months' interest OR Interest Rate Differential (IRD)
• IRD can be substantial with large rate differences

The IRD Calculation (Simplified)

IRD = (Your Rate - Comparison Rate) × Remaining Balance × Remaining Term

Example:

• Current rate: 5.5%
• Comparison rate: 4.0%
• Balance: $400,000
• Remaining term: 3 years

IRD = (0.055 - 0.040) × $400,000 × 3 = $18,000

This is why fixed-rate penalties can be so high.

When Early Renewal Makes Sense

Do the math:

1. Calculate your penalty
2. Calculate monthly payment savings with new rate
3. Multiply savings by remaining months
4. If savings > penalty, early renewal may make sense

Example calculation:

• Penalty: $8,000
• Monthly savings: $200
• Months remaining: 48
• Total savings: $9,600
• Net benefit: $1,600

The Blend-and-Extend Option

Some lenders offer a blend-and-extend, which:

• Combines your old rate with a new rate
• Extends your term
• Avoids the full penalty

This can be a middle-ground solution. Learn more in our blended rate mortgage guide.

Timing Considerations

Best times to consider early renewal:

• Rates have dropped 0.75%+ from your current rate
• You have 12+ months remaining (more time to recoup penalty)
• Your lender uses posted rates for IRD (higher penalties)

Proceed with caution if:

• Only a few months remain (just wait for renewal)
• You have a variable rate at prime (penalties usually manageable)
• Rate differences are small

What About Porting Your Mortgage?

If you're moving, you might be able to port your mortgage to your new property instead of breaking it. This:

• Avoids penalties
• Keeps your current rate
• May require blending if borrowing more

Questions to Ask Your Lender

Before deciding:

1. What is my exact penalty amount?
2. How is my IRD calculated?
3. Do you offer blend-and-extend?
4. Can I port my mortgage if I sell?

FAQ

Q: Can I negotiate my penalty?
A: Rarely, but some lenders offer promotions that rebate part of the penalty if you stay with them.

Q: Is the penalty tax-deductible?
A: Generally no for your primary residence. Consult your accountant for rental properties.

Q: Should I wait for rates to drop more?
A: Trying to time the bottom is risky. If the math works now, it may be better to lock in certainty.

Q: What if I'm also taking out equity?
A: Refinancing to access equity is different from a simple rate-and-term renewal. See our home equity refinancing guide.

Q: How does early renewal affect my credit?
A: Minimally—it's a new mortgage, not a default. Your payment history remains positive.

What's Next

Early renewal decisions require careful math. Avoid the common renewal mistakes many homeowners make, and consider working with a broker who can access multiple lenders and calculate your true cost-benefit scenario.