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Amid high interest rates and economic uncertainty, here are the best ways to navigate a new contract
The real estate market is a roller coaster. When it comes time to renew your mortgage, you might be asking yourself whether you want to stay on the ride or hop off.
The interest rate hikes of 2022 haven’t made the ride any easier. At least the Bank of Canada announced last week that interest rates will hold at 4.5 per cent, meaning that mortgage rates will hover at around 6.49 per cent for a conventional five-year mortgage.
“Interest rates are likely higher than when you first bought your home,” said Carissa Lucreziano, vice-president, financial and investment advice, CIBC. “When looking to renew your mortgage, it’s important to take a step back and look at your ambitions over the next five years.”
You may be nervous about what today’s rates mean for your mortgage. Every percent interest rates go up can mean hundreds, if not thousands, of dollars a month in your bottom line.
For example, if you first got a conventional five-year mortgage in 2018, your interest rate would have been around 4.5 per cent. On a $300,000 mortgage, your monthly payments would be approximately $1,660. When you renew that five-year mortgage in 2023 at a rate of 6.49 per cent, your monthly payments would increase 17 per cent, to $1,948.
Depending on how tight your budget is, an extra few hundred dollars can make a big impact. If you’re looking to renew your mortgage, here are some steps you can take to help make the process smoother and potentially save you money.
Consider extending your term
If you’ve been having a hard time making mortgage payments, you’re not alone. In Q4 of 2022, the Bank of Canada found that 28.75 per cent of all new mortgage holders had spent 25 per cent or more of their income on their mortgage. This is an increase of over 15 per cent from the previous year. These households are considered at greater financial risk, and more likely to fall behind on debt payments if interest rates rise again or they lose their jobs.
If you find things are too tight, Carly Fautley, associate vice president, real estate secured lending at TD, suggests refinancing your mortgage.
When you refinance, you effectively trade in your old mortgage for one with a different rate or term. If you get a longer term, or amortization period, your monthly payments will be reduced.
You’ll have to pay more interest over the course of the mortgage, but this help reduce the monthly stress on your budget, easing painful rate hikes.
Avoid fees by opting for flexibility
If you haven’t purchased your “forever home,” you have additional questions to ask yourself when renewing your mortgage.
“If you’re planning to sell your home in the next few years, having a mortgage that you can transfer (port) with you to a new home is very important,” says Lucreziano.
If you sell your home before your mortgage term ends, you may have to deal with prepayment penalties. These fees can amount to thousands of dollars, so you want to know what you’re facing if you’re thinking of selling your home. The fees are usually either three months interest on what you owe, or the difference between your interest rate, the current rate and the amount of time left on your mortgage.
Check the fine print of your existing mortgage to see if it is transferable, and when shopping for the best mortgage renewal rate, make it one of your top questions to ask.
“Keep in mind,” adds Lucreziano, “as you purchase your new property, you will need to requalify for your new mortgage.” This means you’ll need to provide key documentation to your lender, like proof of ownership, income and insurance, so you’ll want to gather these documents as soon as you can.
Find security with a fixed-rate mortgage
Fixed-rate mortgages offer predictable payments at a known percentage. This makes it easier to budget since your rate doesn’t change over time, so your payments will be the same for the term.
“Given the current economic environment, we’ve seen a growing preference toward short-term fixed rates versus variable-rate mortgages,” said Lucreziano.
“However, Canadians who are renewing their mortgages, understandably, have questions about whether they should lock in their mortgage and for how long.”
Lucreziano points out some things to consider if you’re thinking about a fixed rate when you renew:
If you choose another fixed-rate mortgage, you will again have consistent payments.
If interest rates decrease, you’re still going to be locked in at the same higher rate.
You may be able to offset the higher rates if you make a lump sum payment, or increase your current payments to pay off the balance faster.
Pay down your debt faster with variable-rate mortgages
How would an increase in interest rates affect your lifestyle?
Have you taken advantage of making larger mortgage payments to pay down your mortgage faster?
These are two questions Lucreziano says you need to consider when you think about renewing to a variable-rate mortgage.
A variable rate will have you pay a different amount to your principal and your interest with every movement of interest rates. Variable-rate mortgages have traditionally had lower interest rates, but in the age of rate hikes, that’s no longer the case.
“Typically, people who can handle increases to their monthly payments feel more comfortable opting for a variable-rate mortgage,” said Lucreziano. But she also knows that interest rate increases may make you question if this is the best option.
When rates are descending, variable-rate mortgages let you pay off more of the principal — instead of interest — so that you can pay off your mortgage faster. If you move or want to pay your mortgage sooner, Fautley says paying the prepayment penalty may be cheaper “than breaking a fixed mortgage term.”
With a variable rate, you also have the option to convert to a fixed-rate mortgage at any time — provided that you only have three years or less remaining on your existing term.
Variable-rate mortgages “usually allow for larger than normal mortgage payments,” says Lucreziano, which means you can carve away at your debt when you have the additional funds.
Don’t wait until the last minute
You know when your mortgage term ends, so don’t wait until the last minute to start shopping for the best rate.
When you renew your mortgage, you don’t have to stay with the same provider. If a competitor is offering a better rate, you are free to switch lenders. The more time you give yourself to look for a new mortgage, the easier it is to change providers.
You can also use a competitor’s rate to help you negotiate a better deal if you want to stay with your current bank. A mortgage broker can also help you find the best rate on your mortgage renewal. While you’ll pay a fee for their services, you’ll generally make up the costs in the reduced mortgage payments.
If it’s coming time to renew your mortgage, be sure to explore all the options available to you. If you’re able to, put down as much as you can toward the principal so you can lower your monthly costs. You should also shop around for the best mortgage rates available.
Are you looking to buy or sell property? If you’d like, we can have a real estate expert show you the most efficient process that saves you thousands of dollars, a lot of time, with little or no inconvenience to you. Contact us today!