Mortgage Basics

Can You Pay Off Your Mortgage at Renewal?

Can You Pay Off Your Mortgage at Renewal?
Written by
  • Ashley Howard
| 25 October 2023
Reviewed, 27 October 2023

Table of contents

    When it comes to mortgages, many homeowners wonder if they have the option to pay off their mortgage in full at renewal. The idea of being mortgage-free is enticing, as it can bring a sense of financial freedom and peace of mind. 

    In this article, we will explore the possibilities of paying off your mortgage at renewal and what you should consider before making such a decision. If you’re not in a position financially to pay off your mortgage at renewal this time, we will also provide some helpful strategies to help you pay off your mortgage faster.

    Key Takeaways

    • Mortgage renewal is the process of signing a new agreement where you will select a new rate and term.
    • Consider paying off your mortgage at renewal if you have the financial means and already have a healthy retirement fund, RRSP and TFSA accounts, and no other high-interest debts. 
    • You can pay down your mortgage faster by changing your payment frequency, making prepayment or lump sum payments toward the principal, or refinancing.

    Understanding Mortgage Renewal

    Before paying off your mortgage at renewal, let’s first understand what a mortgage renewal entails. 

    When you initially obtain a mortgage, you agree to a specific term, typically ranging from 1 to 5 years. At the end of your mortgage term, you have the opportunity to renew for another term, selecting a new term length and interest rate based on current market conditions. 

    During the renewal process, you also have the option to make changes to your mortgage, such as choosing to make a lump sum payment toward the principal or paying off the mortgage in full.

    Can You Pay Off Your Mortgage at Renewal?

    The short answer is yes, you can pay off your mortgage at renewal. However, you should consider a few things before making this decision. 

    One of the primary considerations is your financial situation. It’s important to assess whether paying off your mortgage in full aligns with your overall short and long-term financial goals. 

    You should also consider whether you have the necessary funds to pay off your mortgage without impacting other areas of financial progress.

    Assessing Your Financial Situation

    Before deciding to pay off your mortgage at renewal, it’s crucial to evaluate your current financial situation by considering the following:

    Emergency Fund

    Do you have an emergency fund in place?

    An emergency fund is essential to financial health. An emergency fund will help cover unexpected expenses or any disruptions in income, like during a layoff. 

    It’s recommended to have at least three to six months’ worth of living expenses saved in an easily accessible account before considering paying off your mortgage.

    Other Savings and Investment Vehicles

    Do you have other savings vehicles, such as an RRSP or TFSA? 

    These savings accounts offer tax advantages and can help you achieve long-term financial goals. It’s important to ensure that paying off your mortgage doesn’t hinder your ability to save for retirement or other important life milestones.

    High-Interest Debt

    What about any high-interest debt? 

    If you have other outstanding debts with higher interest rates, it’s generally advisable to prioritize paying off those debts first. This is because the interest rates on these debts can add up quickly, making them more costly in the long run to pay off. Additionally, carrying a high balance on term loans such as a mortgage won’t affect your credit score in the same way as a highly utilized high-interest credit card.

    Future Financial Goals

    Be sure to consider your future financial goals, such as paying for your children’s education or investing. 

    If you have plans to invest, it’s important to look at what returns you could see from investing (ROI) compared to paying off your mortgage. 

    If paying off your mortgage hinders your ability to meet these goals, it may be more beneficial to allocate your funds toward them instead of your mortgage.

    Strategies to Pay Off Your Mortgage Faster

    If you decide that paying off your mortgage at renewal isn’t the right choice for you, there are several strategies you can employ to accelerate paying down your mortgage debt. 

    Let’s explore some of these strategies:

    Increase Payment Frequency

    One effective way to pay off your mortgage faster is to increase the frequency of your payments. Instead of making monthly payments, consider making accelerated bi-weekly payments. 

    By doing so, you can make the equivalent of 13 monthly payments in a year, reducing the overall interest you pay and shortening the length of your mortgage.

    Make Lump-Sum Payments

    Another strategy is to make lump-sum payments towards your mortgage. If you come into extra money through a bonus, tax return, or inheritance, consider putting a portion towards paying down your mortgage principal. 

    This can reduce the overall balance and save you money on interest payments. If you use this strategy, ensure you are aware of any annual prepayment limitations or deadlines on your mortgage so you aren’t hit with prepayment penalties. 

    Take Advantage of Prepayment Options

    Many mortgages offer prepayment options, allowing you to make additional payments towards your mortgage without penalties. 

    Take advantage of these options by making extra payments whenever possible. Even small additional payments can make a significant difference in the long run. 

    As with making lump sum payments, ensure you are aware of any prepayment limitations on your mortgage so you don’t end up paying prepayment penalties, which could eliminate any savings. 

    Consider Mortgage Refinancing

    Mortgage refinancing is another option to pay off your mortgage faster. 

    Refinancing your mortgage, you can potentially secure a lower interest rate or adjust the term length to better suit your financial goals. 

    However, it’s important to carefully evaluate the costs associated with refinancing to ensure the savings outweigh any additional costs you will incur by using this strategy.

    Note: Refinancing when mortgage rates are lower in the marketplace could mean a higher prepayment penalty for paying your mortgage early.

    Frequently Asked Questions

    Should I pay off my mortgage at renewal?

    If you are considering paying off your mortgage at renewal, first look at what return on investment (ROI) you could receive from investing that money instead of paying off your mortgage. You’ll need to consider if you could make more with an investment than the interest you would save from paying off your mortgage. 

    Consider your savings and ask yourself: Do I have enough cash in an emergency fund to last at least 6 months if needed? Do I have a healthy balance in my RRSP and TFSA? It may be more beneficial to build up some savings you could fall back on before you consider paying off your mortgage.

    Should I pay off my mortgage instead of investing?

    Paying off your mortgage usually isn’t the best strategy to increase your net worth in the long run. Investing generally gives you a higher return on investment (ROI) compared to the mortgage interest rates you will pay over the life of your mortgage. If you pay off your mortgage first, you could miss out on these gains.  

    Paying off your mortgage over diversifying your investments only increases your overall risk should inflation erode your property value or the Canadian dollar’s purchasing power.

    How long does it typically take to pay off a mortgage?

    Mortgages in Canada usually have a 25-year amortization period. This is the length of time that it is estimated it will take to pay off your mortgage in full. You can reduce the time to pay off your mortgage and save on interest by taking advantage of prepayment privileges or increasing the payment frequency to an accelerated option.

    Final Thoughts 

    Paying off your mortgage at renewal is possible, but it’s essential to consider your financial situation and short and long-term goals before making this decision. Assessing your emergency fund, other savings, high-interest debt, and future financial goals is crucial in determining whether paying off your mortgage at renewal is the right choice for you. 

    If you decide paying off your mortgage at renewal isn’t for you, employing strategies such as increasing payment frequency, making lump-sum payments, utilizing prepayment options, or considering mortgage refinancing can help you pay off your mortgage faster. 

    It’s always best to consult a mortgage professional to explore options that align with your unique circumstances and financial objectives.