Worried about upcoming Mortgage Renewal?
A mortgage nearing maturity or renewal has not been a stressful time for a long time now, but it can feel every different for those of you whose mortgages are coming up for renewal in the short little while. It’s not one of those occasions wherein you can afford to be lazy and let your bank or lender choose the default renewal option. Most of you will need to seriously review your finances and make a choice that you can keep up with. Before you read the rest of this post do review my last post about suitability of variable rate mortgages (here) and then come right back for recommendations regarding making these decisions.
Recommendations that I am about to share assume that your mortgage is coming up for renewal before the end of 2022. Since the actions that you could take may differ based on your current mortgage among other factors, I have organized them accordingly. Also, note that if there is a need to switch to a different lender then you would have to initiate the process at least 6~8 weeks ahead of the maturity date.
Currently in a Fixed rate mortgage - In case you had secured a new mortgage or renewed your mortgage in the last couple of years, you most probably have an interest rate which is much lower than what’s available on renewal these days. While the interest rates have runup since 1st quarter of 2021 and are witnessing new highs every month, it might not be advisable to lock yourself into carrying such high interest costs (relatively speaking) for the next 5 years or so. If you are most comfortable being in a fixed rate mortgage, then I would suggest considering a 2-to-3-year term on renewal so that you have the surety of a fixed payment in the short term and an opportunity to potentially change course as things settle down on the economic front. I know many borrowers who were locked into a fixed rate mortgage with very high penalty to break their mortgage when interest rates slumped over the last couple of years and if you have the same fear then I would recommend opting for a non-Big 5 bank mortgage if going the fixed rate route. There are lenders offering renewals at much lower interest costs than the big banks and costs to transfer the mortgage are also covered by most.
Currently in a Variable Rate mortgage – Being in a variable rate mortgage saves you much in interest costs when we are in a declining interest rate environment. We have been in such an environment for the last couple of decades and it was even more pronounced in the last 3 years or so. We have definitely taken a break from such a setup since March 2022, and we could see elevated costs of borrowing for the next couple of quarters. Nothing out there appears to suggest that we have broken away from the long-term trend of declining interest rates but if you want to play it safe for the next little while I would suggest opting in for a fixed rate mortgage of a shorter term (2 to 3 years). Refer #1 above for suggestions if going the fixed route. Also, many of you might have an existing variable rate mortgage or want a variable rate mortgage wherein the monthly payment doesn’t change over the term even if the Prime Rate changes. Again, this product works wonders when you are in a declining rate environment, but you would be faced with the prospects of compounding interest costs in an increasing rate environment. So, make sure to proactively keep increasing your monthly payments as Prime Rate increases. You can use a mortgage calculator to figure out the payment amount or increase payments by $28 for each $100,000 of mortgage whenever the Prime Rate increases by 0.50% or 50 bps.
New monthly payments are too high – In case you currently do not have a variable rate mortgage (with changing monthly payments), then you might be faced with the prospect of having a much higher monthly mortgage payment on renewal. If you do not have the ability to make such payments, you will need to explore your options to increase the amortization (or repayment period). Speak with a mortgage broker regarding your situation.
Plan to sell soon – If you are planning to sell the property soon, then I would recommend getting a term that best matches with your timeframe for selling. If that happens to be within the next 6 months of maturity date, then you can consider an ‘Open’ mortgage. If you are unsure of the timing, then choosing a variable rate mortgage might be a better choice as your penalty will be limited to three months of interest costs for most standard mortgage products.
Need to Refinance – There are many borrowers out there who were faced with the prospect of a high penalty to break the mortgage during 2019-2021 and so a high interest rate environment like today’s can be a good opportunity to get out of such tough contracts. You could use this opportunity to:
a. Consolidate your debts and reduce overall interest costs
b. Extend the amortization period of the mortgage or change the structure of the mortgage to improve the cashflow and or debt service level
c. Take Equity out for home renovation, gifting towards down payment for your children, investments, etc. Would recommend keeping the new Loan to value to less than 65% for now and there are ways to keep the provision to borrow more later as things improve.
Choice between Fixed and Variable mortgage could be made based on recommendations mentioned under #1 and #2 above. Also note that you do not necessarily have to bet on one option as there are ways to hedge this choice.
In life, never let an opportunity to make changes for the betterment go by un-utilized and the maturity of your mortgage is a very good time as far as finances are considered. Not making timely and thoughtful decisions can prove costly every day of the next mortgage term.
Cheers to being clever with your money!