Your plan for a more affordable mortgage renewal

Your mortgage payment has always — more or less — fit into your budget. Sure, some years, your mortgage renewal may have been more stressful than others, but you always managed to make it work.

This time around, however, things seem to be different. Interest rates are much higher than they were a few years ago. So, you’ve crunched the numbers and found out that, like many other Canadian homeowners, your monthly payments are going up.

Many BC homeowners have been in the exact same situation in recent months. In fact, monthly mortgage payments went up an average of $680 post-renewal in the fourth quarter of 2023, according to Equifax Canada. That’s compared with $450 nationally.

With statistics like these, it’s no wonder six out of 10 people are worried about their mortgage renewal. The idea of higher rates is understandably a source of financial stress for many Canadians, but you don’t necessarily have to accept a huge payment increase.

Securing the lowest mortgage rate possible right now is one way to fit mortgage payments into your budget. But when it comes to finding mortgage renewal options that work for you, a great rate is just the start.

It’s time to investigate options to help make your mortgage more affordable and reduce the impact of a higher-than-expected rate on your finances. Here are a few strategies worth exploring as you head into your mortgage renewal.

The average amortization period — or the length of time you plan to take to pay off your mortgage principal and interest — is 25 years in Canada. Generally, the longer your amortization, the lower your monthly payments, as you will be paying off your loan over a longer time.

If you’re looking to lower your mortgage payments in the short-term and you’ve been paying a mortgage with an amortization of 20 years, consider what lengthening your amortization might mean for your monthly payment.

Let’s look at an example. A $500,000 mortgage with a 5.30% interest rate and a 20-year amortization would cost you $3,367.10 per month.

Changing the same mortgage to a 22-year amortization would give you a monthly payment of $3,195.24 instead, saving you just over $170 per month now, or $2,000 per year. That’s a significant difference if you are concerned about fitting your new mortgage payment into your budget.

Keep in mind — Before changing your amortization period, think through the consequences of paying off your mortgage for longer. While lengthening your mortgage amortization means you might benefit from lower payments now, you will be paying more interest over the life of your mortgage.This option also requires reapplying to qualify, so it should only be done if necessary.

This is an option to explore to help cash-flow in the short term. But your mortgage will still need to be paid off in full, and the lower your payments are, the more interest you will accrue.

If you’ve got 365 days or more left on your existing mortgage before renewal, you might qualify to ‘blend and extend’ your mortgage rate.

Here, your lender will combine your previous fixed mortgage rate with the current fixed rate they’re offering to create an average rate. Depending on factors like how long you have left on your current mortgage term, the rate you’re paying now and the current rate, the blended rate could be higher or lower than the rate you’re already paying.

Blending and extending may allow you to:

• Lock in your renewal early at a favourable rate without paying penalties for breaking your mortgage.
• Potentially access a rate that is lower than the rate you would be paying in a year, which could be a favourable option in a time of high interest rates.
• Have peace of mind knowing that you’re locking in a rate you’re comfortable paying.

How does it work? Let’s say you have a $500,000 mortgage, and one year left on your five-year fixed term, with a 3.00% rate.

The lender’s current rate on a new five-year fixed rate term is 5.30%. But your blended mortgage amount, for a new five-year term, would be 4.84%.

Remember: Locking in your mortgage type at renewal also isn’t forever. Your advisor may also be able to recommend whether other strategies might work for you, and what you can do today to kickstart those strategies.

For example, it may work better for your situation to choose a five-year variable rate now and switch to a fixed rate when there’s more market clarity around which way the prime interest rate will move.

Traditionally, Canadian homeowners have most often chosen a five-year fixed rate mortgage term at each renewal. But that might not be ideal for every kind of homeowner. The challenges the current market has presented have shown that these unprecedented conditions require unconventional solutions.

Shorter-term fixed rates — such as a one, two or three-year mortgage term — may offer a few advantages if you’re renewing right now. Here’s why:

• By locking in a fixed mortgage rate instead of choosing a variable option, you’ll have the peace of mind of knowing your payment amounts. Plus, you’ll be protected if interest rates increase further over the next one to three years.
• At the same time, you’re only locked in for a short time, so if interest rates fall instead, you’ll have the flexibility to take advantage of a new, lower mortgage rate sooner, without paying a penalty to break your mortgage.
• Planning to refinance or sell your home? Short-term mortgages often charge lower break penalties than longer term ones. Or, if you’d rather wait until your next renewal to make a move, you’ll benefit from a shorter term.