Saving strategies to prepare for your mortgage renewal

Perhaps you scored a seriously low interest rate a few years ago, but now the time to renew your mortgage is coming up and the rates are higher. If you’re feeling uneasy about what this might mean for your financial situation, you’re not alone.

Almost all mortgages taken out in Canada before March 2022 are set to renew by the end of 2026. And with variable and fixed rates higher than they were a few years ago, many borrowers are wondering what their payments will look like this time around.

If your mortgage renewal is still a year out, there are steps you can take to adjust to your new mortgage, and make sure it doesn’t knock your budget off kilter. Adjusting your budget now will help you stay on track with saving goals like retirement, or other debt repayment plans.

Working a bigger payment into your budget can work if you take control now and test-drive your new rate. You wouldn’t buy a car without test-driving it, so why go into your next mortgage term without an idea of how it will impact your budget?

How do you do that? You strategically budget as if you are paying for that increase before you sign on for a term. This way, you are training yourself to budget and prepare for that rate without making a commitment.

Well, just how do you prepare for a mortgage rate increase? You start by reviewing your overall budget, as well as using a mortgage calculator to see how the two fit together.

If your mortgage renewal is next year, it’s time to look at your financial ‘big picture’ with the help of your advisor. Regularly reviewing your finances is part of any healthy financial plan and is a great opportunity to make sure you’re heading into your renewal with the best possible game plan.

If you don’t have buffer room in your budget to put any extra funds to your mortgage already, you’ll have time before committing to a new mortgage term to make changes.

The extra amount you’ll have to contribute to your mortgage payment each month will need to come from another source by:

• Gaining unexpected income (bonuses, inheritances, windfalls, etc.)
• Cutting back on discretionary spending areas like travel or eating out
• Consolidating your debt to a low-interest line
• Prioritizing debt repayment ahead of renewal to free up extra cash

Let’s say that for the past few years, Joe has been paying a fixed rate of 3% on his $500,000 mortgage, with a 25-year amortization.

Joe’s mortgage payment is just over $2,350 each month. As he approaches renewal, it’s time to meet with a mortgage advisor to explore his best rate options.

In this example, consider what a five-year fixed rate of 6% might mean for Joe’s monthly payments, with a remaining mortgage balance of around $425,000.

Even though Joe has paid down his mortgage over the last five years, the higher interest rate would push his monthly mortgage payment to over $2,700 – more than $350 per month higher than it has been over the last 5 years, or some $4,000 per year.

At this point, you will have a better idea of how much you can comfortably set aside each month and where this amount will come from. Now, there are low-risk strategies you can use to be proactive, avoid the sticker shock of your mortgage renewal, and even get yourself ahead in the process!

Taking the example above, where your mortgage payment may increase by as much as $350 a month where you take on a five-year fixed-rate mortgage of 6%. Saving a lump sum each month leading up to renewal can provide a big boost to your bottom line.

Let’s say you’re 180 days (about 6 months) out from your renewal period. If you’re able to set aside even $75 a week in your no-fee high-interest savings account (especially a savings account with a bonus offer for new deposits), you’ll accumulate as much as $1,800 by renewal time. And that’s not even including interest.

The advantages of saving up a lump sum ahead of renewal are:

• It gets you in the habit of putting more money aside for your mortgage payments
• You can choose to put the amount you’ve saved down as a one-time payment on your mortgage before renewal, which will reduce your overall principal and the amount of interest you’re paying over the life of your mortgage
• Or you can use it to build a financial cushion or rainy-day fund to help you face unexpected costs as your budget adjusts to the new reality of higher payments

If you’re renewing with a new lender, you’ll not only have to afford your new mortgage payment, but you’ll have to pass the mortgage stress test. This test ensures you’ll be able to afford payments that are 2% higher than the rate you negotiate.

For example, if you are quoted a new mortgage rate of 5.3% with a new lender, you’ll also have to qualify at a rate of 7.3%, just to be on the safe side, should rates go up even further.

If you choose to renew with your existing lender, the stress test doesn’t apply.

Once you’ve experienced what your projected rate is like for the rest of your budget, you will have a few different options to explore:

Keep in mind, these are just a few of the options you can explore. An advisor can offer tailored recommendations throughout the renewal process, especially if this is your first mortgage renewal.