Can you recast your mortgage?

How do pre-payment privileges work to allow extra money down?

Putting money down on your principal during your mortgage term is called a pre-payment — and the details of how much and when you can pre-pay may differ by lender.

The more flexible your pre-payment privileges, the more you can put down — or perhaps more often. For example, a lender may allow a lump sum on your mortgage anniversary (when your contract started) or along with a mortgage payment.

Some lenders allow as much as 20% of your mortgage balance (based on the balance at the beginning of your term) to be placed onto your principal annually:

• Lump sums and increased payments may be possible
• Pre-payments reduce your loan balance, and you'll pay less interest than originally calculated
• Your amortization is also reduced (the amount of time to pay off your mortgage in full)

With pre-payment room on your balance and amortization, you have more options to save — over time with a reduced balance, with a recast now, or at renewal to help lower your payments.

How a mortgage recast works with THINK Financial:

• A phone call to the servicing department is needed to process your lump sum amount and reduce payments at the same time
• If you pay a lump sum online through your account, you can call at a later time to have your payments lowered
• Recasting isn't done too close to your mortgage payment date (so that it doesn't interfere with calculations)
• No fee is charged, and the minimum pre-payment to recast is $100, though a much larger pre-payment amount is needed to make a difference in your payment
• There's no limit to the amount of times you can recast with a lump sum payment

Not all lenders allow a mortgage recast, and some charge a fee. If you can't recast, you'll need to wait until your renewal period to lower your payments.

Here's an example of the payment effect with a mortgage recast.

Have you recently sold a second property or have come into an inheritance? Recasting your mortgage after placing a large lump sum on your mortgage (for example, a full 20% if allowable) can take a big bite out of your monthly payment.

Based on a $500K mortgage, 25-year original amortization and a 5-year fixed mortgage rate of 5.0%:

3 years into term (22 years amortization remaining) and a $100K lump sum (full 20% allowable) reduces the mortgage balance to $367,236

Monthly payment before mortgage recast: $2,908
Monthly payment after recast: $2,285
Budget room freed up ~ $623 a month

An extra $623 per month adds up to about $15K taken off your payments for the remaining two years of your term!

But even a smaller lump sum may be worth your while to help with extra expenses:

Based on the above details, 3 years into term (22 years amortization remaining) and a $20K lump sum reduces the mortgage balance to $447,236

Monthly payment before mortgage recast: $2,908
Monthly payment after recast: $2,783
Budget room freed up ~ $125 a month

That $125 a month adds up to about $3K of budget room over the remaining 2 years left on your term!

Is it better to keep your payments the same after a lump sum?

If you decide to keep your payments the same and not recast them lower, you'll continue to put more down on your principal faster — the portion going towards interest in your unchanged payment decreases, and the principal portion increases.

However, you may decide that some budget relief now is more important versus paying off your loan faster (and the savings are realized in a shorter amortization).

Should you recast or refinance?

Has your credit or income situation improved since you took out your mortgage loan? If it's enough to qualify you for a lower rate, refinancing may save you more than recasting your mortgage, even with penalties that may be incurred to break your term.

Or, perhaps you put extra down on your principal but then decided you need additional funds for a bigger purpose, such as home upgrades or investments. Again, in this case, a refinance vs. a recast can help you gain the cash you need — at a lower rate than other credit sources (like a personal line of credit or credit cards).

When does a recast not make financial sense?

Paying down a lump sum and recasting for lower payments may not always be your best option. For example, if you have outstanding payments on other debt that need immediate attention or if you can increase the benefit you'll receive by investing the amount in another financial product.

Keep in mind that the amount you invest in your mortgage is 'after-tax' savings, risk-free.

A mortgage recast isn't the same as extending your amortization.

With a recast, your payments are recalculated only to where your current amortization sits (minus time served).

For example, if your original amortization is 25 years, and you're 3 years into your first 5-year term, your payments are lowered based on 22 years remaining, not 25.

Refinancing is required to extend your payments back to your original 25 years (for an insured mortgage) or up to 30 or more with an uninsured mortgage, which breaks your current contract to create a new one.

Get help to steer the (mortgage) boat.

Your expert True North Mortgage broker can help steer you in the right direction to cast your line for the most savings — we know where the fish, er, lenders and products swim to catch the right one for your situation.

We're obsessed with your best rate and mortgage fit. And we have so many ways to help you save on your mortgage — it's worth a call or email to see what we can do for you.

Anywhere you are in Canada, we make it easy to apply with us — online or through Morgan (our esteemed chatbot), over the phone, by email, or at a store near you.