Taking On a Budget-Busting Mortgage Renewal

3 Ways to Take on a Budget-Busting Mortgage Renewal

With interest rates still high, renewing your mortgage probably won’t be the best part of your 2024. If you’re worried about the impending cost of your home loan, keep these strategies in mind.

If you’re nearing your mortgage renewal date in 2024, you could be facing a nightmare scenario.

Posted three-year and five-year fixed mortgage rates are higher than they’ve been since 2008. The best variable rates are hovering around 6% and may not tick down until the summer

Elevated rates alone are enough to stretch a homeowner’s finances. But with decades-high inflation eroding incomes, affording substantially higher mortgage payments becomes even dicier.

If you’re facing a mortgage renewal this year, don’t despair just yet. Strategies exist that can help you afford your mortgage’s next term.

1. Be a shrewd negotiator

Chris Kolinski, a mortgage broker at iSask Mortgage Solutions in Saskatoon, says some lenders are offering mortgage renewal rates that are almost 2% higher than the average five-year fixed mortgage rate.

With that in mind, assume your current lender’s initial renewal offer isn’t their best — and politely reject it. You’re under no obligation to accept it, or renew with them at all.

Find out what other lenders are offering on renewals. If their rates are significantly lower, point that out to your lender and see what happens. They may be willing to negotiate rather than watch your mortgage, and the next few years of interest payments, walk out the door.

Your lender does, however, have an advantage: If you decide to renew with another lender, you’ll have to requalify. Your income, credit score and debt service ratios will all go under the microscope again, and if you have an uninsured mortgage, you may have to pass another stress test.

Re-upping with your current lender to avoid going through the qualification process again is valid. Just remember to negotiate first.

2. Find relief through refinancing

If you’ve made it to the end of a mortgage term or two, you likely have several years of home equity at your disposal. If so, you should be in a position to refinance your mortgage. Refinancing can provide two paths to a more manageable mortgage term.

Extend your amortization period

If you’ve ever played around with a mortgage payment calculator, you’ll know that longer amortization periods lead to smaller monthly payments. Extending the overall length of your mortgage is an option when refinancing.

“If you’ve got 15 to 20 years left [on your mortgage], maybe you want to consider re-amortizing and bringing your mortgage back to 25 years or 30 years in order to have more manageable payments,” says Chris Allard, a mortgage broker with Smart Debt Mortgages in Ottawa.

“We don’t want to take longer to pay down our mortgage, but first and foremost, we have to be certain we are comfortable with our current monthly cash flow,” Allard says.

If you’ve been making accelerated weekly or bi-weekly payments on your mortgage, Kolinski said re-amortizing might be as simple as increasing your amortization back to what it would have been if those extra payments hadn’t been made. This strategy is more common when switching to a new lender.

Tap into your equity

Another option when refinancing is to turn some of your home equity into cash via a home equity loan or line of credit. The funds can then be used to pay off other debts or set aside (maybe in a GIC or high-interest savings account) as an emergency fund.

“By paying off credit cards, lines of credit or car loans, either we’re saving on interest or we’re saving on cash flow,” Allard says.

As with re-amortizing, borrowing equity will increase the overall size of your mortgage, but the financial peace of mind it brings could be invaluable.

Remember that the refinancing process is more involved than renewing. You may need to pay legal fees and get your home appraised, so make sure your finances are prepared for a modest hit.

3. Beware of private lending

If your financial situation has deteriorated, or you’ve fallen behind on your mortgage payments, mainstream lenders may not offer a renewal. In these rare cases, private lenders and the short-term financing they offer can seem like a beacon in the dark.

But borrowing from a private lender can cast a long shadow over your finances.

Because they’re often a last resort for borrowers with credit issues, private lenders tend to charge high mortgage rates. If you aren’t able to pay off your private loan on time, you’ll have to renew and incur what can be steep renewal fees — a risky option if your financial situation is already shaky. Private lenders might also foreclose on your home more quickly than mainstream lenders.

If a private lender is your only renewal option, align yourself with a reputable company recommended by an experienced mortgage broker. There are a lot of private lenders in Canada; you don’t want to hand your financial future over to someone who’s only in it for the fees.

A teachable moment for home buyers

Renewal anxiety will hopefully be a temporary state of mind for Canadian homeowners. But there are some lasting lessons all buyers — current and future — can glean from a high-rate environment..

There is no crystal ball. “We cannot predict rates,” Kolinski said. “When getting a mortgage you need to look at everything — not just the rate — to make sure you are getting into the best product for your needs.”
Reassess your budget — often. “If you consistently review your budget, I think you’ll probably find a way to respect it. If you don’t know what your budget is, it’s easy to fall out of line with your lifestyle choices and expenses,” Allard says.
Variable-rate mortgages are always risky. Variable rates are influenced by the state of the Canadian economy, the future of which nobody can predict. Your variable rate might fall and stay low during your mortgage term, but it could also spike. If you or your finances aren’t equipped to handle that risk, the predictability of a fixed-rate mortgage might be a better choice.

Current mortgage renewal rates are similar to what’s available on purchase mortgages. As of January 23, 2024, five-year fixed mortgage rates were sitting below 5%, while three-year fixed mortgage rates were around 5.2%.

In cases where your credit or income has deteriorated, your lender may not offer you a mortgage renewal. When this happens, you can still apply for a renewal at a B lender or private lender.