Canadians renewing their mortgage in the next six to eight months face a three-pronged dilemma.
For many, there’s the question of how to handle the financial shock from much larger mortgage payments, as homeowners renew at significantly higher interest rates. A year and a half into the Bank of Canada’s rate-hiking cycle, that’s become a familiar issue for mortgage holders.
But for households renewing in the near future, there are two additional sources of uncertainty and stress. First, there’s the question of whether the central bank is truly done with rate increases. The bank held its trend-setting rate steady on Sept. 6, but there are two more rate decisions before the end of the year and no guarantees that rates won’t climb again, especially if inflation picks up again.
On the flip side of that, the prospect of no more hikes is also a headache for those with upcoming renewals. Some economists expect rates to decline fairly rapidly – as soon as the spring of 2024 – after topping out. Those with impending renewals risk locking into record-high rates and missing out on future cuts.
So what are borrowers to do?
“There’s no magic get-out-of-jail-free card,” said James Laird, co-chief executive officer of financial products comparison site Ratehub.ca and president of mortgage lender CanWise. But planning ahead goes a long way, he added.
Here are four strategies mortgage brokers are using to help clients as they renegotiate in this tricky environment.
Test drive the new mortgage rate. The first step is to estimate what your postrenewal mortgage instalment will likely be based on current rates and adjust your budget as if you were already paying the larger amount, said Frances Hinojosa, CEO and co-founder of Toronto mortgage brokerage Tribe Financial Group.
The point is to understand whether you’re going to be able to manage the new payment, she said.
Lengthen the mortgage amortization. If the new payment seems unworkable, you may be able to stretch out your amortization – the time it takes to pay off the loans in full – to reduce the size of your mortgage instalments.
If you’re ahead of schedule on your amortization – because you’ve made lump-sum payments or opted for accelerated payments – you can simply tell your lender you want to revert to the original amortization schedule, said Victor Tran, a mortgage expert at Rates.ca, a rates comparison website, and a mortgage broker at True North Mortgage.
If you have no wiggle room, you’ll need to refinance your mortgage to draw out the amortization, replacing your old loan with a new one either at the same or a different lender. This entails some extra costs, including legal fees and an appraisal, which Mr. Tran estimates at roughly between $1,500 and $2,000 in Ontario.
Keep in mind also that resetting the amortization usually means you’ll pay more in interest over the life of the loan as you take longer to pay it off.
To refinance, you’ll have to pass the mortgage stress tests, which ensures you’ll be able to keep up with your mortgage payments even at rates substantially higher than the contract rate offered by your lender.
Many borrowers are currently facing a stress-test rate of around 8 per cent, which is a high bar to meet. Homeowners who can’t clear that threshold won’t be able to refinance. But in a quirky side effect of the stress test, lengthening the amortization, which lowers payments, actually makes it easier to qualify, Mr. Laird noted.
Still, lenders won’t be able to extend amortizations beyond 30 years. For those with variable-rate, fixed-payment mortgages who have already seen their amortization stretch to 30 years or more, buying more time isn’t an option, Ms. Hinojosa said.
Get a rate hold and break your mortgage. With a mortgage pre-approval, lenders will often guarantee a mortgage rate for up to 120 days. If you’re worried rates will climb again, consider securing a rate hold even if your renewal date is more than four months out, Mr. Laird said.
If rates don’t rise during that four-month period, you can let the rate hold expire at no cost, he said. If they do increase, it may be worth breaking your mortgage to take advantage of the rate guarantee. An environment of high interest rates means fees for getting out of a mortgage early are low right now even for fixed-rate mortgages, which typically have stiffer penalties, Mr. Laird said.
Sign up for a shorter-term mortgage. Borrowers who don’t feel comfortable opting for a variable-rate mortgage worry about locking into a record-high fixed rate right now, Mr. Tran said. With one-year fixed-rate mortgages coming at a significant rate premium, many are choosing loan terms of two or three years, he added. That’s still shorter than the five-year terms that Canadians traditionally prefer.
The three-year term, in particular, has been “very popular” over the past year, Mr. Tran said.