advertised rates today are approaching half of those rates from a little over a year ago. Two weeks ago, CIBC dropped their discretionary 4-year fixed mortgage rate to 1.49%. For people who locked into a 3, 4, or even 5-year fixed rate mortgage, it is often possible to reduce your interest costs despite large penalties for breaking your mortgage contract. The detailed math is rather complicated, so I'll stick to explaining some tips that will minimize those penalties and therefore maximize the savings from an early renewal.
Most of the big-5 banks have online mortgage prepayment penalty calculators, which are a lot easier than doing the interest rate differential calculations yourself. Next contact the branch responsible for your mortgage, tell them that you are considering an early renewal, and ask what their discretionary rates are. In the past week, for a 4yr fixed-rate mortgage, CIBC quoted me 1.49%, while BMO and BNS both quoted me 1.59%. Calculating your exact savings is also rather complicated, so I use a simpler formula that only off by a percentage point or two on the total savings. Take your current mortgage rate, subtract your new rate, multiply by the number of years remaining in your mortgage term, and multiply that by your principal. So if your mortgage is $200,000 with two years left in the term, your current rate is 2.94%, and your new rate is 1.59%, your interest savings will be:
$200,000 * 2 years * (2.94 - 1.59)% = $5,400
If $5,400 is substantially more than the prepayment penalties, then you should consider an early renewal. I calculated a number of scenarios based on typical interest rates on a $200,000 mortgage with 2-4 years left, and in most scenarios the net savings exceeded $1,000. If the savings are about equal to the penalties, there may still be ways of reducing those penalties. TD Canada Trust has an unadvertised mortgage replacement policy, that can reduce your penalties by up to $1,000 if you refinance to add at least $20,000 to your mortgage. Since simply increasing your mortgage principal by $20,000 may require the expense of a new appraisal, I have another tip. Before refinancing, borrow $20,000 from a line of credit, and use it to make a prepayment on your mortgage. Then when you refinance, adding back $20,000 to the mortgage should not require a new appraisal. In addition, your penalties will be reduced by the $20,000 prepayment.
For people that have a large line of credit or TFSA, it is possible to significantly the penalties for an early renewal by maximizing the prepayment privileges on your mortgage. TD clients can make a prepayment equal to 15% of their original principal balance, once per calendar year. With the end of 2020 approaching, you could make one prepayment now, and another in early January before refinancing into a lower rate. Most of BMO's mortgages are even better, with 20% prepayment privileges per calendar year. BNS is a bit different, allowing prepayments once per anniversary year.
Since refinancing requires re-qualifying for the mortgage, this option is not recommended for people that have had a significant reduction in income. But even an early renewal will usually result in net savings, and it doesn't require re-qualifying. Happy holidays and happy saving!