In the midst of the pandemic, many Canadians jumped at the chance to buy homes and refinance their mortgages at all-time low interest rates. Fast forward to today, and these rates have had a steep increase, driven by the Bank of Canada’s efforts to tackle inflation. For those staring at an impending mortgage renewal, this uptick might feel unsettling. But remember, even though we can’t dial down these rates, there are smart ways for homeowners to soften the blow of a rate increase.
Understand the impact
If your mortgage renewal is on the horizon, it’s smart to have a chat with your Mortgage Broker. Here’s why.
Interest rates can be confusing. Your advisor can make things clear by explaining how an increase might affect your payments. For instance, if rates climb by 5%, how much will your payment go up? Your advisor can help you understand the impact that the rise in rates has on you and your mortgage.
Map out your future
Maybe your goals have changed since you first got your mortgage. You might be considering moving homes, planning a big trip, or other life events. Your advisor can help adjust your financial strategy to fit these goals. Plus, your mortgage is just one part of your financial life. If you’ve got other debts or savings goals, your advisor will show you how a potential rate change could affect the bigger picture.
Explore new avenues
There could be financial paths you haven’t looked at yet. Maybe there’s a different loan type that suits you better, or perhaps you could benefit from consolidating some debts. Your advisor can guide you through these choices. They’ll also keep you updated. The financial world changes all the time, and by staying in touch with your advisor, you’re always in the know.
- Plan ahead for possible rate increases: What you can start doing today
For example:
With a possible 5% rate increase and 25 more years on your mortgage:
Owing $300,000: You might pay about $1,754 every month.
But if you owed $250,000: It could drop to around $1,462 each month.
That’s a difference of $292 saved each month, or $3,504 in a year. If you keep this up for 5 years, you might save $17,520. If you start paying more now, even with higher rates later, your monthly payments might be easier on your wallet.
Preparation begins long before the renewal date. Being proactive gives you a stronger footing, regardless of where interest rates move.
Make lump-sum payments
Let’s say you secured your mortgage a few years ago when interest rates were at an all-time low. Since then, rates have risen, and now there’s a potential 5% increase to your interest rate as your renewal date approaches in the next couple of years. Here’s where paying a chunk of your mortgage now can help.
By paying more than you need to right now, you do two big things: you’ll pay less interest over the life of the mortgage and when you renew, the increase in payment may not be as big.
Why make a big lump sum payment, like $50,000, now?
At first, using $50,000 to save $17,520 in 5 years might not make sense. But add up all the benefits, and it becomes a smart move. It’s about more than just the next few years. It’s about your whole financial picture.
Long-term savings: The example showed saving $17,520 in 5 years. But, by reducing your mortgage principal now, you’ll keep saving on interest for as long as you have the mortgage.
Pay less interest today: By making a large lump sum payment right away, you start saving on the interest cost the moment you make the payment. This means more of your regular scheduled payments will go towards principal and less towards interest.
Building home equity: By paying more now, you’ll own more of your home. This is helpful if home prices change. It also means you’re in a good spot if you want to use your home value later, like for home fixes or other big purchases.
Being mortgage-free faster: If you pay a big amount now, you might be able to own your home sooner than planned.
Ready for anything: By owing less and having smaller monthly payments, you can better handle any surprise costs. It’s less worry, especially if money gets tight.
Increase the amount and frequency of your mortgage payments
As interest rates rise, the traditional monthly mortgage payment schedule might feel like it’s not doing enough to get you ahead of the game. Paying a bit more, and more often, can help in a couple of ways.
By choosing to pay a little extra now, you’re practicing for times when a rate increase might increase your monthly payment. It’s like a rehearsal for the future. So, if rates go up in the future, you’re already used to bigger payments, and it won’t be a big surprise.
Example:
If your regular payment is $1,500 monthly, adding an extra $100 and then switching to accelerated bi-weekly payments means an extra $2,800 goes towards your mortgage in just one year. Over five years? That’s $14,000 off your mortgage. And remember, you also save because you won’t be paying interest on that amount.
When you add a bit more to your monthly payment, you’re also reducing the amount of your mortgage principal. That means you’ll pay less interest, especially if rates keep climbing. And if you switch from monthly to accelerated bi-weekly payments, you’ll end up making an extra monthly payment every year. This change alone can knock a big chunk off what you owe over time.
- Crunch time: Smart moves as renewal gets closer
If your mortgage renewal is around the corner, reach out to your advisor about five months ahead. This gives you time to understand your options and decide on the right move for you.
Rates going up? Lock in early
If you have a variable rate mortgage and spot interest rates creeping up, going for an early renewal can be a smart move. Think of it as calling “dibs” on a good deal before it slips away. By renewing your mortgage ahead of its actual end date, you can lock in at a current, lower rate. This way, you’re side-stepping those higher rates and potentially saving a good chunk of change over the course of your mortgage. So, if you’ve got that feeling that rates might jump soon, it might be time to chat with your advisor about renewing early.
Think about refinancing
When it’s time to renew your mortgage, you have a chance to make some changes. Refinancing means you can change how long you take to pay off your mortgage, making your monthly payments smaller. Plus, if you’ve been paying your mortgage for a while, you might have a significant amount of equity in your home, which you may be able to use towards other goals.
Combine your debts
Do you have a car loan, credit card bills or even a loan from a store? You can add all these to your mortgage. Why? Your mortgage interest might be lower than what you’re paying on those other loans. So, by putting everything together, you can save money. Plus, it’s simpler to make one mortgage payment instead of many different payments.
Example:
Sarah is approaching her mortgage renewal. Here’s a snapshot of her current financial situation:
Mortgage Balance: $250,000 at 3% interest.
Car Loan: $15,000 at 6% interest.
Credit Card Debt: $10,000 at 18% interest.
Retailer Loan: $5,000 at 9% interest.
Combined, her monthly payments amount to $2,142.33.
Now, Sarah learns that her new mortgage rate will be 8%. This means her monthly mortgage payment would rise significantly. But instead of panicking, Sarah considers refinancing and consolidating her other debts into her mortgage.
Consolidated Mortgage: $280,000 at 8% interest (accounting for her original mortgage and other debts). Her new consolidated monthly payments amount to $2,164.11.
The Result: Despite the mortgage interest rate increase, Sarah’s total monthly payment increases only slightly from $2,142.33 to $2,164.11, an added cost of just $21.78 per month. But here’s where it gets interesting: even though she’ll be paying a tad more monthly, Sarah will benefit in the long run. She’s tackling her other high-interest debts, especially that pricey credit card, under the 8% interest rate of her new mortgage. This means she’ll end up saving a considerable amount on interest payments, making her financial journey smoother and more predictable.
Quick tip: Sarah’s example is about keeping her new monthly payments as close to what she’s currently paying, even after her mortgage rate goes up. But, if Sarah can manage to spend a bit more each month, she might choose not to consolidate her car loan into her mortgage. Doing this would mean her monthly payment would go up another $140, but she’d finish paying her car loan in 5 years as planned.
So, when thinking about consolidating your debts, it’s important to look at your own money situation and what you want to achieve. This is where it’s helpful to talk to an advisor to figure out what’s right for you.
Let’s make a plan to navigate rising rates with confidence
Rising interest rates can be tough, and acting now can make a difference. Chat with an advisor early to explore your mortgage options both now and as your renewal approaches. You have choices — from making lump sum payments to adjusting your mortgage payment amounts and frequency, or exploring refinancing and debt consolidations. It’s all about finding what suits your needs and keeps your finances resilient in the face of higher rates. So, reach out for advice to help you smooth out your financial journey.