Are you facing mortgage renewal in the coming months? Yeah, me too.
If you’re like me, you’re among the millions of other Canadians with a mortgage renewal on the horizon, you may be feeling the financial pressure. My rate last time wasn’t the best on the market at the time, but at 2.79 was pretty darn good and offered me many flexible options, which we’ll talk about in a bit. Many homeowners across Canada got locked in mortgage rates below 2% during the previous low-rate environment, but with current fixed rates hovering around 4.2% or higher, the reality of significantly higher monthly payments is setting in. And setting in fast.
To ensure you’re ready for the changes, here’s how to make the best financial decisions as your renewal approaches.
Firstly, make sure you explore all of your renewal options. When your mortgage term ends, your lender will offer you new terms, usually at higher rates. If you decide to stay with your current lender, you won’t need to pass the mortgage “stress test” again, which can be a huge relief for those facing today’s higher rates. The stress test requires homeowners to prove they can handle payments at the higher of either the Bank of Canada’s qualifying rate (around 5.25%) or your actual rate plus 2%.
However, if you’re looking to switch to a new lender in search of better rates or terms, you’ll need to pass the stress test at the new, higher rates. This can limit your options, especially if your financial situation has changed, making you ineligible to switch lenders. Many homeowners are feeling “trapped” with their current lender because they no longer qualify elsewhere.
Take time to evaluate both your current lender’s renewal offer and potential alternatives, but be mindful that switching may require jumping through more hoops. I know with my lender they’re flexible on mortgage pay down options which we’ll chat about in a moment.
There’s a very real possibility that your payments are going to be a lot higher. A jump in interest rates from below 2% to 4.2% or more could significantly increase your monthly payments, adding hundreds or even thousands of dollars to your mortgage bill. This can strain your budget if you aren’t prepared.
The best way to manage this is to anticipate the changes right now, like, today. Use online mortgage calculators (such as the Canada Mortgage and Housing Corporation’s Mortgage Calculator) to simulate different rate scenarios and estimate your new payments. If the projected amount feels unmanageable, start adjusting your spending habits immediately. Begin by cutting discretionary expenses like dining out, subscriptions, or non-essential shopping. Build an emergency fund that can cushion any future financial strain if you don’t already have one.
Additionally, consider putting aside extra cash each month to make an additional payment before your renewal date. Any payments you make before renewal will reduce the principal balance, not just the interest, ultimately lowering your future monthly payments. Making even small extra payments can be a smart strategy to reduce your mortgage faster.
My mortgage is a fixed-rate mortgage as I’m super risk averse and love the stability they offer. Variable-rate mortgages may be worth considering though because of today’s unpredictable interest rate environment. Some economists are predicting the Bank of Canada may start reducing rates over the next 12 months, which could make a variable rate mortgage more appealing if you want to take advantage of potential rate cuts.
If you have financial flexibility and can tolerate fluctuations in your payments, a variable-rate mortgage might allow you to benefit from falling rates as the economy cools. However, there’s always the risk that rates could rise further, and your payments could increase before they decrease. Make sure to assess your financial situation and risk tolerance before committing to a variable rate. Scary.
It might feel tempting to renew your mortgage early to lock in a new rate before rates climb even higher, but this could work against you. Renewing early at a higher rate might result in paying more than you need to if rates stabilize or even drop slightly before your actual renewal date.
Take your time and monitor the interest rate landscape closely. My lender has already sent me an email to make an appointment with them for my renewal which is due in April. Are they bananas? That’s six months away! Mortgage rates can fluctuate, and even a small dip in rates can make a significant difference over the life of your loan. You want to lock in at the right moment to minimize your payments.
Navigating the renewal process can be daunting I know, but a mortgage broker can help you explore all your options and make the best decision for your financial situation. Brokers have access to a broad range of lenders, including ones you may not have considered, which can be helpful in securing a more competitive rate.
A broker can also provide guidance on whether it’s worth switching lenders, especially if you’re concerned about passing the stress test with a new institution. They can also advise you on whether a variable or fixed-rate mortgage would be better, based on your risk tolerance and financial goals.
My mortgage broker is phenomenal and asked all the right questions to make sure he found the right mortgage for me. My goal wasn’t to have the mortgage around my neck for 35 years but to get it paid down as quickly as possible paying as little interest as possible. And funnily enough, that meant that the best mortgage for me wasn’t the one with the lowest interest rate, but with the most flexibility.
As I mentioned, I wanted to pay down my mortgage as fast as possible. I had a 20-year mortgage that will be paid off by next summer. That’s 11 years earlier than the 20-year mortgage term. I used a combination of strategies to achieve this. By paying down your mortgage faster, you’ll reduce the amount of interest you pay over time, and free up cash flow sooner than expected (allowing you to increase your investments).
- Make Extra Payments Now: Before your renewal, try to make additional payments toward your mortgage principal. Any extra payments will go directly toward reducing your loan’s principal, rather than just paying down interest. Even small amounts can make a big difference over time and can help reduce future monthly payments.
- Bi-Weekly Payments: Switching to a bi-weekly payment schedule is an easy way to accelerate mortgage repayment. Instead of making 12 monthly payments per year, bi-weekly payments result in 26 payments annually, effectively giving you one extra payment every year. This can shave years off your mortgage and save you thousands in interest. Play with your numbers in the mortgage calculator.
- Double-Up Payments: If you come into extra money, such as a work bonus or tax refund, consider making double payments. Many lenders allow you to “double up” on your mortgage payments, which helps reduce your principal faster. Even doing this occasionally can have a positive impact on your mortgage timeline.
- Annual Lump-Sum Payments: Some lenders offer flexible options that allow you to make a lump-sum payment annually without penalty. This is another great way to reduce the principal and, by extension, the interest you pay over the life of your mortgage.
By carefully managing your mortgage renewal and employing some or all of these flexible payment strategies, you can minimize the impact of higher interest rates while positioning yourself for long-term financial stability.
Take your time, do your research, and ask friends for a recommendation for a local mortgage broker. This is your money, so work on getting the best deal for you so you can continue to build wealth and enjoy life.