Over the next three years, hundreds of thousands of Canadian homeowners will find themselves confronted with mortgage renewals at notably elevated rates. If you’re one of those homeowners who locked in an attractive interest rate in the past few years and are losing sleep over your mortgage renewal and what can happen when your mortgage payment increases, we wrote this guide, just for you.
70% of Canadians will have their mortgage coming up for renewal in the next 3 years
First, know that you are not alone. It may not be helpful to say it, but many Canadian homeowners are losing sleep over their mortgage renewals. Given that the quintessential mortgage preference spans a five-year term, the bulk of renewing borrowers shall bid farewell to the rates established by their lender in 2019, when the BoC's policy rate rested at 1.75%, and instead contend with rates pegged to the current, and substantially higher, 5% policy rate. No, this doesn’t make the situation better, but there are options and strategies that you can consider to soften the impact of your renewal and even save you money. Here we go…
Anticipate an Increase in your Mortgage Payments at Renewal
The inexorable truth remains—mortgage payments are poised to escalate for those renewing this year. Facing this truth head-on and preparing for it is always better than waiting for that pesky renewal letter from your bank and not having the time to understand your options and strategies.
Your first strategy is to be very aware of your mortgage renewal date and plan ahead. Second, you’ll want to understand how an increase will impact your monthly mortgage payments. You don’t have to get a precise estimate, but there are many great mortgage calculators online that will help you figure out the magnitude of your increase, given today’s rates. If you understand whether you’re facing a $200 monthly increase, as opposed to a $2000 monthly increase, it will make a difference in your plan and strategy.
“The first thing you can do after you figure out the ballpark of your mortgage increase is to plan ahead by revisiting your household income and budget” says Reuven Gorsht, Co-Founder & CEO of Deeded, a leading mortgage closing platform. “For example, if your mortgage payment is going up by $1000, you’ll need to find that much in either savings from other categories where you’re spending your money, or figure out how to generate that amount as extra income”, adds Gorsht.
Most importantly, keep in mind that whatever plan you come up with, it will take time to realize the savings or additional income you need. For example, if you need to take on a side hustle, it might take some time or planning, so remaining proactive and giving yourself plenty of runway prior to your mortgage renewal makes a lot of sense.
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Do Your Research, Solicit Options, and Engage in Negotiation
Most Canadian homeowners will receive a letter from their lender or bank about 90 days prior to renewal, while some banks will be even more proactive and may reach out with a promo or offer even prior to the 90-day period.
One of the biggest mistakes a homeowner can make is to just sign the bank’s letter and accept their renewal terms without the proper research or comparison with other options. Doing so, locks you into a new term with your current lender. While it’s the “easy” way out, you can be leaving tens of thousands of dollars on the table over your next term.
To understand why a mortgage comparison is essential takes understanding how things work on the insides of a bank. A bank (or any mortgage lender), spends thousands of dollars to acquire borrowers and issue new mortgages. These costs come in the form of marketing, paying salespeople or brokers commissions, legal fees, and underwriting the new mortgage. Your bank subsequently makes their money back, and profits, from interest that you pay. The bulk of the interest on your mortgage is charged to you during the first few years of your mortgage term with that lender. That’s how the banks recoup their costs of acquiring you as a customer.
Therefore, at renewal time, lenders are generally less to engage in negotiations for renewals, given the presumption that renewing with the existing lender represents the path of least resistance.
Use a Mortgage Broker
There’s a misconception out there that going to the banks directly may save you money or that brokers charge fees to use them. The reality is that mortgage brokers get paid a commission from the lender. In most cases, your cost to leverage a broker is zero, but your benefits can be substantial.
Brokers not only have access to dozens of lenders with different products, but they can do a lot of the legwork that may take you weeks or months to accomplish. You would typically spend some time with them up-front so they can understand your financial situation, consider your property, income, and life plans, and help you shop around for the product that may best fit your needs. Whether it’s the rate you’re most concerned about, or perhaps you’re looking to downsize in three years and need a flexible mortgage product, a broker can add value and help save you time by doing all the legwork.
If you require an introduction to a great broker in your area, please connect with our team and we can introduce you to one of our many broker partners.
Reevaluate Amortization Extension
Some lenders and banks may offer the option of extending your mortgage amortization period at renewal may be an option to lower your payment when facing a higher rate. Extending amortization means elongating the loan's duration by several years invariably translates to a substantial increase in total interest outlay.
Effectively, this defers the impending payment shock, but your overall time to pay off your mortgage can extend substantially, as a result.
Avoid Renewing with the “assumption” of Rates Cuts
In the past few years we’ve seen the bank of Canada flip-flop their stance on interest rates multiple times. We’ve come a long way from the BoC’s initial stance that rates will be low for a long time and while the inflation numbers have improved, nobody, including the Bank of Canada, has a crystal ball as to what rates will be or what can potentially impact rates over the next few months.
Therefore, do not assume that you can sign your mortgage renewal now and face lower rates a few months down the road. Consider a term and product that gives you what you best need to manage your household budget and life plans. Ultimately, the decision hinges upon your risk tolerance and the borrowing capacity you can afford.
Avoid Jitters on Switching Lenders
Moving your mortgage to another lender may sometimes be the most viable option and give you the negotiation leverage you need when your mortgage renews. Many Canadians have the misperception that moving lenders is very difficult, if not impossible. Others may fear that they have other products such as chequing, savings or investment accounts with their current bank, so it's easier to just keep everything in one place.
While your bank may be your best option and has a product that suits your needs today, switching lenders does take an effort, but it's not as hard as most people believe it to be. It will take some work, but if your efforts can result in significant savings, it is certainly not impossible.
Closing your Mortgage with Deeded
If you do your research and decide that switching lenders is the right thing for you, you'll likely obtain a mortgage commitment from your new lender first. Subsequently, you'll need to go through a legal process called "closing" in order to move your mortgage from one bank to another. A mortgage closing involves several steps including paying off your current mortgage and registering a new mortgage with your new lender. This is where our team at Deeded shines. Once you've found a great new mortgage product, we can make your mortgage closing process seamless and smooth and alleviate a lot of stress along the way.
Learn more about how Deeded can make your mortgage closing seamless.
Be Proactive
A cardinal rule for prospective renewals is timeliness—procrastination can cost you.
This may sound repetitive, but being proactive will not only save you money, but can also greatly reduce your stress. Shopping around for a mortgage option, whether you decide to use a mortgage broker or approach banks yourself, takes time and effort. It will require you to gather documentation about your income and credit to qualify and get approved. Delaying until the eleventh hour risks limiting your options.
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