Your Mortgage Playbook for 2022-23

Found this interesting video on YouTube and couldn’t resist including it with this article. I thought a little parody might help lighten up the mood before we discuss about some difficult choices. So, watch the video and then use this blog as a playbook to expertly guide your mortgage decisions…

It should not be news to you that the cost of borrowing has been increasing since March 2021, but the impact of these costs has not been consistent across borrowers as everybody takes on debt in different ways. Borrowers seeking a Fixed rate product were the first to feel the impact while borrowers seeking Variable Rate products only started feeling the impact from early this year or many have probably not yet realized the impact of these increases.

As far as outlook for these increases is concerned, nobody has a clear view of the future, and unfortunately these things get clearer only in hindsight. Till yesterday (19th Oct 2022), most economists were expecting that inflation will continue to show a strong downward trend, but that view appears to be softening now. The trigger for that is Consumer Price Index (inflation figure) for September 2022 came in at 6.9% and while it continued the downward trend observed in months of July 2022 (7.6%), August 2022 (7%) and June 2022 (8.1%, this was the peak), the pace of the decline has reduced significantly. The estimate for September CPI was 6.6% ~ 6.7% depending on the poll.

Given all these ups and downs, I am sure the personal question that confronts most people is twofold... “How do I position my finances given the impacts that I am suffering today but also be better prepared for the foreseeable future?” & "What costs should I pay for a sound sleep?" So, let me try and address these questions for different situations using a broad stroke.

Disclaimer: Before you read any further, please recognize that all suggestions given below are generic in nature and are addressed from a narrow viewpoint. Your specific situation might be combination of these scenarios or maybe there are other considerations that need to be made, and so consult with your agent / advisor before taking /NOT taking any action.

Situation #1 – Your mortgage (“Fixed” or “Variable”) is not maturing in the next year or so, but you have significant other debts, and those payments are increasing / starting to hurt or become unmanageable.

Potential solution: Try getting a 2nd mortgage and consolidate the non-mortgage debts for a lower payment

Situation#2 – You have a “Fixed” or “Variable” rate mortgage and it’s maturing in the next 3 ~ 6 months, but you have significant other debts, and those payments are unmanageable.

Potential solution: Look at consolidating all debts into the single or multiple mortgage(s) depending on the nature of the debts. If your current interest rate/monthly payment is much lower than prevalent rates/payment levels, then you would be looking at significantly higher monthly payment unless you can increase your amortization period.

Situation# 3 – You have a “Variable” rate mortgage and your monthly payments have not increased this year. What you have probably failed to recognize is that your interest costs have increased (and substantially) and your principal borrowing is NOT reducing at the originally intended pace resulting in a longer amortization (maybe as high as 50 to 60 years). If this situation persists for longer, your bank may require you to increase your monthly payments right away or you could be looking at drastically higher monthly

payments on renewal.

Potential solution: Try to divert a portion of your savings to supplement the mortgage payment and thereby address whole or part of the increased interest costs. Speak with your agent / advisor to determine what a meaningful contribution could be. You could also look at implementing Smith Manoeuvre to preserve or keep up with targeted contributions to your non-registered investments. Watch below video to know more about Smith Manoeuvre.

Situation# 4 – You have a “Variable” rate mortgage (and maybe HELOC also) and your monthly payments have increased drastically this year. You have been bearing this increase with a view that this increase will be temporary in nature but now you are starting to doubt this view.

Potential solution(s): There are several ways that you can approach to deal with this.

a. If it's not hurting too much you may NOT make any changes and see how the situation plays out. This should have been your original intent when you took on such a mortgage otherwise it was not the right mortgage for you.

b. You should be able to convert your entire mortgage into a Fixed Rate mortgage at your current lender without paying a penalty. Depending on your lender, this might mean the new mortgage will be a 5-year Fixed or with a term closer to the “time to maturity” left on current mortgage. I would highly recommend NOT opting for a 5-year Fixed at this point as interest rates are high and may not remain this elevated for such a long period. If your lender is not offering a favorable term, then you can always pay the penalty (usually 3 months of interest costs) and choose a more favorable term with the same or different lender but that will involve re-qualifying, and you may or may not be eligible depending on your debt service ratios. The latter can be very difficult for those who have multiple properties with mortgages on them.

c. You can also convert your HELOC borrowings into a standalone “Fixed” Rate mortgage. Though, will suggest going for a short term like 1 to 3 years.

d. Try to divert a portion of your savings to supplement the mortgage payment and thereby reduce your outstanding mortgage faster. If you have a re-advanceable mortgage, you could also look at implementing Smith Manoeuvre (see video under Situation# 3) to preserve or keep up with targeted contributions to your non-registered investments. Plus, benefit from increased net worth; and reduced amortization period, future interest costs and income taxes.

Situation# 5 – You are 55 years or older and do not have an active income; but depend on fixed income from investments, interest or rent and are finding it hard to make the monthly mortgage payments and/or are raking up balance on your credit cards, Lines of credit, etc. month on month.

Potential Solution: You could consider a reverse mortgage if your primary home is mortgage free or has very less outstanding mortgage. This can be a short- or long-term solution depending on the current state of your finances and any other adjustments that you can plan to make in future.

Situation #6 – Your mortgage (“Fixed”) is not maturing in the next year or so, but you have a significant mortgage (other debts are minimal) and you are concerned about payments going up on renewal.

Potential solution: If it’s your primary home, then try to make use of the generous prepayment options available with each mortgage and pay down the outstanding balance as much as possible. If you have a re-advanceable mortgage, then you can quicken the pace of this paydown by implementing Smith Manoeuvre and reduce your amortization period, future interest costs and income taxes drastically while potentially increasing your overall net worth.

Situation # 7 – You currently have a mortgage with a Private Lender or B lender and the term is maturity in the next couple of months.

Potential solution: Private lenders have reduced their Loan to Value considerations, and with decreasing property prices you may not be able to carry the same loan to another private lender. Interest rates at alternate lenders have also increased drastically (upwards of 6% for 1 year term) and so qualification is much tougher. So, unless your income situation has drastically improved and/or you are able to significantly pay down the outstanding balance, your only recourse may be to try and get a renewal at the same lender, try and bring on co-applicants who can help you qualify or maybe sell the property.

Situation# 8 – You stretched your finances to the limit and recently bought a property or refinanced an existing property to its full extent and you financed the borrowing using a “Variable” rate mortgage with fluctuating payments (ARM). With increasing monthly payments, you are finding it difficult to manage the payments and are looking for a fix.

Potential solution: You would have been qualified for the mortgage using an interest rate of at least 5.25% and so technically you were still within acceptable debt service levels unless subsequently there was a job loss, you took on other debts, etc. Interest rate on most variable rate mortgages were still under this limit as of 20th Oct 2022 (day when this article was drafted). Unless your income has increased significantly, have a minimum of 20% equity and have 25 years or less of amortization, it may be quite difficult to re-qualify for a new mortgage with a lower/fixed payment. You have some difficult choices to make in case you are unable to re-qualify:

A. Continue to be in a variable rate mortgage and take your chance with how high the mortgage payment may go

B. Convert to a fixed rate mortgage (possibly only 4 or 5-year term is offered to you) and lock into a higher but fixed payment. You may want to consider breaking the fixed rate mortgage when the rates start to decline in future and are still closer to your locked in rate.

Either way you might have to look closely at your monthly expenses and trim them down to the bare necessities and/or see if you can increase your income by taking up a 2nd job, renting out a portion of your home, etc. You might even have to prioritize which payments you will make (make your mortgage payments!) / when you will make. If you are having an insured mortgage then depending on your specific situation and mortgage insurer, you might be eligible for some relaxation if you are unable to make the mortgage payments.

Note: Depending on the nature of your debts, there may be tax implications when combining debts and if so, do speak with your accountant in addition to your mortgage advisor or agent.

In closing, I wanted to share another light hearted video to highlight the two schools of thoughts which present some contrasting ways in which governments and central banks should govern the fiscal and monetary policy, and thereby the nation's economy.