Should you pay off your mortgage at renewal?

This post was originally published on October 6, 2021, and was updated on April 24, 2024. 

With files from Jordann Brown

When getting a mortgage in Canada, there are two critical lengths of time to be aware of: your amortization period, and your mortgage term. 

The first refers to the total length of time it takes to completely pay off your mortgage in full. Your mortgage term, on the other hand, is the contract you take out with your lender that specifies whether it is fixed or variable, your interest rate, and other product features, such as the ability to make a lump sum pre-payment or port your mortgage.

The term also clarifies whether a mortgage is considered to be open or closed. An open mortgage offers the greatest flexibility, and can be paid off in full at any time without penalty. A closed mortgage, however, cannot be paid before its term is up; doing so is considered breaking the mortgage contract, and the borrower will be charged a penalty. 

For variable mortgages, this penalty is equal to three months' interest, while fixed-mortgage penalties are based on either this, or a calculation called the  interest rate differential – whichever is higher. As a trade off for this decreased flexibility, closed mortgages offer much lower interest rates than open ones. However, some closed mortgage products do allow borrowers to make smaller lump sum payments (usually between 10 and 20%) annually or monthly.

The length of the mortgage term is also key; compared to an amortization schedule, which stretches over decades, the mortgage term is typically just a few years long, meaning most borrowers will have several terms over the course of their entire mortgage. Today, the most popular mortgage term in Canada is five years long, fixed, and closed. 

In the video below, James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender, discusses some of the pros and cons of variable vs. fixed rates when looking for a mortgage rate in today's mortgage environment. Even if you're thinking of paying off your mortgage balance in full, it's worth checking it out to see if you might want to explore one of the possibilities outlined by James. 

Also read: Mortgage term vs amortization

Exploring your renewal options

When your mortgage term expires, you’ll need to re-negotiate for a new one, and it’s at this point that borrowers have a few options, including:

• Renewing their mortgage with their existing lender 
• Shopping around and switching to a new lender

However, in cases where they are financially able, borrowers may choose to use a lump sum pre-payment to pay down part, or all, of their mortgage at renewal time. While not a particularly common approach (few borrowers tend to have that much liquid cash on hand) it can happen, especially for those who may have received an unexpected windfall, perhaps through an inheritance or lottery winnings.

Also read: Should I pay down my mortgage with a lump sum, or invest?

There is a specific approach that must be followed to pay off a mortgage entirely at renewal without penalty. First, have a look at this video with some helpful tips for renewing your mortgage in 2024. Then, let’s take a look at the requirements, and whether it’s the right strategy for you.

How to pay off your mortgage in full at renewal time

Regardless of the type of term, at mortgage renewal time the mortgage is considered “open” for exactly one day. This is to allow for the process of starting a new mortgage term, whether with the existing lender or a new one. However, it also means that on this day the borrower has the flexibility to pay off as much of their mortgage as they like without having to adhere to the restrictions of their previous mortgage term.

The borrower may choose to pay off their entire mortgage, or pay off a chunk before transferring their mortgage to a new lender.

Paying off the mortgage in full requires making a lump-sum payment and then going through the process of discharging the mortgage, which requires a real estate lawyer. First, the lender will send the borrower a confirmation that they paid their mortgage in full. In some cases, the borrower may need to make a special request for this confirmation. The lawyer will then provide this confirmation to the local land registry office so that they may update the property’s title and remove the lender’s interest in the property from the title. Once the land registry updates the property’s title, the mortgage is officially discharged, and the borrower is mortgage-free.

Transferring a remaining mortgage amount after paying off a chunk involves bringing a cheque to FTC – the closing service that lenders use – a week or so prior to the mortgage’s renewal date. The borrower should have already let their mortgage agent and new lender know that their payout statement will reflect the amount they’ve paid down, and the new, lower mortgage amount they’d like funding for.

Transferring the mortgage to a new lender also comes with a few other benefits; shopping around will help the borrower secure the lowest possible mortgage rate. If desired, borrowers also have the option to advance cash from their home’s equity, which can be spent on anything from home improvements, post-secondary education, debt consolidation, and more.

However, the process may incur additional fees such as:

• Setup fees with the new lender
• Fees to discharge your old mortgage and register your new mortgage
• Transfer or assignment fees from your current lender
• Appraisal fees to confirm the value of your property
• Administration fees
• Legal fees

Also read: Renewing your mortgage in 2024: What to expect

The bottom line

While it is possible to pay off your mortgage at renewal, consider whether your lump sum of money could be put to better use. For example, your lump sum of cash may serve you better if you invest it in the stock market or use it to pay off high-interest credit card debt.

That said, if you’re dreaming of the day when you no longer need to make mortgage payments, paying off your mortgage on your renewal day is possible and may be the right financial strategy for you.

Also read:

• Renewing your mortgage in 2024: What to expect
• Should I pay down my mortgage or invest?
• Mortgage pre-payment guide
• Should you switch from a variable-rate to a fixed-rate mortgage?
• What happens if your mortgage renewal is denied?
• 5 tips for mortgage renewal time
• The trigger rate: Everything you need to know

*Based on a $700,000 home price, 10% down payment, amortized over 25 years, and a five-year fixed mortgage rate of 4.64% vs. 4.39%.