Tips for Renewing Your Mortgage in 2023
The real estate market can feel like a roller coaster full of exciting highs and lows. However, the interest rate hikes in 2022 and 2023 did not go smoothly. People renewing their mortgages this year will no doubt be under some financial pressure.
Mortgage rates have risen over the past year as the Bank of Canada continues to raise borrowing costs to combat rising inflation. Interest rates have risen fivefold since last October and many mortgage borrowers are struggling to repay their mortgages. For example, if you took out a $300,000 five-year conventional mortgage in 2018 with an interest rate of 4.5%, your monthly payment would be about $1,600. If you renew your mortgage this year with an interest rate of 6.49%, your monthly payment will increase by 17% to $1,948.
Fortunately, the Bank of Canada kept the overnight rate at 5% in its last rate announcement on October 25th. But whether it’s been two or five years since you last renewed your mortgage, your interest rates may be higher than they were before.
If you’re on a tight budget, even an extra $100 can make a big difference. According to the Bank of Canada, in the second quarter of 2023, 29.18% of all new mortgage holders spent more than 25% of their income on their loan. Here are some tips for managing new contracts:
1- Start shopping early
The saying “the early bird catches the worm” is especially true when it comes to mortgage renewals.
Although your lender may send you an extension notice about 21 days before your mortgage is due, you should be proactive and start the process several months in advance. We recommend that you start your search 120 days before the expiration date. This is because it is the earliest your lender will allow you to renew your mortgage without a prepayment penalty.
This will allow you to proactively upgrade to a better product or at least better understand your options. You will also be in a better position to negotiate the best interest rate with your current lender. If you are not satisfied with the options offered by your mortgage provider, now is the time to consider switching providers. You may not be able to switch until your renewal date, but you can find the product that suits your needs and get the paperwork ready before then so you don’t have to rush at the last minute.
2- Consider When You Plan to Sell
When you’re renewing your mortgage, it’s important to consider planning for the next five years. If you currently have a five-year mortgage term, your mortgage provider will likely offer another fixed-rate term of the same length. This is a good option if you are certain that you will live in the property or rent it out for the next five years. However, if you are thinking of selling the property in the near future, it may be a good idea to choose a shorter term, such as one or three years, or check whether a mortgage transfer is possible.
If you decide to sell your home before the end of the mortgage term, you may be subject to an early repayment penalty. These costs can be very high, so if you’re thinking of selling, it’s important to know what you’re getting into. This is usually the difference between the current interest rate, the current interest rate and the remaining term of the mortgage. Read your existing mortgage carefully to see if it’s transferable. If you’re looking for the best mortgage deal, don’t forget to make this one of your most important questions.
3. Hire a mortgage broker
If you’re shopping around, hiring a mortgage broker is a smart move. Instead of jumping between multiple lenders to find the best deal, a mortgage broker can take a look at your credit report and create a list of lenders willing to work with you and get you the best rates. If you decide to switch lenders, a mortgage advisor can easily find out what interest rate you can qualify for.
4. Find The Best Prepayment Privileges
Depending on your life circumstances, such as a promotion or inheritance, you may be interested in a better prepayment option. If you can save a significant amount, you can increase your monthly payment or choose a mortgage that offers a higher down payment discount.
Making annual payments is a very reasonable option in today’s mortgage market. That’s because if there is no unpaid interest, all payments go directly to the unpaid principal. This can reduce the interest you pay over the life of the mortgage.
5. Take advantage of price maintenance
If you’re not ready to make a decision right away, you may want to see if your current lender can match your new found interest rate. You have the option to freeze your interest rate. This protects you from interest rate increases for up to 120 days. This is a great strategy if you fear your rates will increase before you upgrade. Don’t worry, rates will be reduced during this period. You can negotiate a new, lower price.
6. Extended amortization period
If your finances are too tight, you may want to consider extending your mortgage. This extends your loan over a longer period, reducing your monthly payments and making it more manageable. For example, a $500,000 mortgage with a 25-year term would result in monthly principal payments of $1,667. If you extend the amortization schedule for another 5 to 30 years, your payment will drop to $1,389. Unfortunately, it takes longer to pay off the mortgage, so you’ll pay more interest over time.
Find peace of mind with a fixed rate mortgage
A fixed rate mortgage allows you to keep your payments consistent with a fixed interest rate. This makes budgeting much easier. With the recent wave of interest rate hikes Canadians have experienced, borrowers are increasingly opting for shorter fixed-rate mortgages of around two or three years. This interest rate is slightly higher than what you would get on a five-year term, but homeowners with shorter terms may be able to renew their mortgage earlier in a better economic time. By choosing a fixed rate, homeowners are protected from future interest rate increases and can hope that the rate will be reduced again when renewal is needed. This is a great option for those who want to play it safe during volatile times but still want to keep their options open. However, if the rates are reduced, you will continue to pay the same high rates.
Pay off your debt faster with an adjustable rate mortgage
If you choose an adjustable rate mortgage, your monthly payment will vary based on the interest rate. If interest rates go up, your payments will go up, or the amount of payments reflected in the interest rate will go up too. But when interest rates drop, the opposite happens, allowing you to pay off your debt faster. This type of mortgage often allows for higher than average mortgage payments. Finally, when choosing whether an adjustable rate mortgage is right for you, you should consider your risk tolerance and whether you can afford a higher mortgage payment.
The Bottom Line
Refinancing your mortgage is undoubtedly a stressful process, so updating your current lender’s terms and interest rates can seem like a quick and easy fix. However, you may not get the best performance or product that fits your lifestyle. By following these tips and doing your own research, you can find the lender, terms and interest rates that best suit your personal and financial situation.