The Pros And Cons Of Early Mortgage Renewal

Written By Alla Levin
August 01, 2022
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The Pros And Cons Of Early Mortgage Renewal

Mortgage renewal is an essential part of homeownership. For most people, mortgage renewal is routine, just like a dental check-up. On the other hand, some people may want to get out of the situation as soon as possible.

Paying off your mortgage earlier than the end term is an excellent financial decision. Once you have completed paying off your mortgage, you will have more cash in hand per month, and you will be saving a lot of money on the interest charges.

However, making extra payments towards the mortgage isn’t a choice for everyone. As per your financial situation, you might be better off focusing on other loans or investing the money instead. Head on to Alpine Credits for more insights when looking to renew mortgage early.

Is it possible to pay off a mortgage early, and what will be the penalty charges?

If you plan to pay your mortgage before the end date, you first need to contact your lender. According to the terms of your mortgage, the company or the lender might charge a prepayment penalty.

Now talking about the penalty charges, some mortgage lenders in specific regions may not be allowed by law to charge any prepayment penalty or other charges for home loans. However, if your mortgage does not fall under these categories, the lender will usually only charge a pre-payment penalty for the first three years.

The charge is generally kept at 2% in the first two years and 1% in the third year.

How do lenders decide your eligibility for a mortgage?How do lenders decide your eligibility for a mortgage

All the federally regulated financial institutions providing mortgage loans in Canada use the mortgage stress test to determine your eligibility for a mortgage loan in the current market.

With the help of this test, the lenders can also determine your eligibility and payment capability if the interest rate increases in the future. So if you plan to renew your mortgage early with a new regulated lender in Canada, your credit score will be assessed, and you will be subjected to this test.

You have to prove to the lender that you can afford the loan and the interest rate, which is in most cases higher than the actual mortgage rate. Even if you do not qualify with a particular mortgage lender, you can always switch to a different one that does not require you to pass this test.

Benefits of an early mortgage pay off

The main benefits of paying off your mortgage early are:

Debt-free life

Once you have successfully cleared your mortgage, your monthly burden will be reduced automatically. Now you can use this money for other expenses. Or, you can also start living on a lesser income, allowing you to work less and relax more.

Moreover, having a mortgage over your head can be pretty stressful. Once you get freedom, it can act as a powerful motivator.

Save money on interest

As you are paying the mortgage loan amount quickly, you will pay the interest rate for a shorter period. As you cut the tenure period, you will also reduce your interest cost, saving a lot of money. Simply put, the sooner you pay off the loan, the more you save on the interest charges.

You completely own your propertyYou completely own your property

If you face a financial crisis, there is a significant possibility that you might not be able to pay the monthly installment. Moreover, the money lender might seize your property. However, it makes sense to pay off your mortgage if you have enough cash now. This will reduce the risk of you losing your home in case of a future financial crunch.

Tap into home equity

You can now tap into the equity of your property if you need sudden money shortly. This can be used to raise more finance at cheaper rates, which you can use for other family needs.

Disadvantages of paying off the mortgage early

Some of the most significant disadvantages of making early payments for your mortgage are:

You can lose mortgage interest tax deduction

If you pay the amount early, your interest payments towards the mortgage will not reduce your taxable income by as much, and the government might subsidize some of them. So in simple words, if you pay the amount ahead of schedule, you might not receive any tax benefits, and your income tax bill might increase.

Opportunity Cost

When you pay off the loan with a limited supply of money or from your savings, you will not be using that money for other purposes. You could have used this money to do many things like:

  • Invest in the global forex and stock market;
  • Prepare for an emergency fund;
  • Safe funds for retirement by investing in IRA.

The pros and cons of early mortgage renewal: low rate of return

When you are paying off a debt early, the return you will get from it is the money saved on the interest rate. In most cases, mortgage rates are meager, especially compared to other loans like personal loans. According to research, in recent years, most people have been able to get a 30-year fixed mortgage rate at an interest rate of about 3% or lower.

Once you pay off your loan early, you get a pretty low rate of return. This situation is especially true if you are considering investing in S&P 500 Index Fund. Investing in this fund can help you earn about 10% average annual ROI.

Affect your credit scoreAffect your credit score

Your credit score depends on numerous factors; a significant one is the mix of credit types. You might have different loans like a credit card, car, or mortgage. Once you close a loan, your credit score will decrease moderately.

The pros and cons of early mortgage renewal: pre-payment penalties

A mortgage pre-payment penalty is a fee you must pay to your lender if you sell, pay off, or refinish your mortgage within a certain period, usually 3 to 5 years. Not all mortgage lenders will charge this fee; however, it is always recommended that you ask your lender.

The pros and cons of early mortgage renewal: endnote

While planning to pay off your mortgage early, you must learn about the terms and conditions and figure out what works for your situation. It is also essential that you know your options, consider the penalty charges, and understand the benefits and disadvantages.

This will help you understand whether paying off your mortgage early is worth it or not.

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