Four Tips to Manage Payments on Your Mortgage Renewal
Twenty percent of homeowners face a mortgage renewal this year. With interest rates at their highest level in decades, many Canadians are concerned about their monthly payments. If your mortgage is renewing this year, here are some tips for your upcoming renewal.
What is a Mortgage Renewal?
In Canada, a mortgage is composed of several contracts – called terms. Technically, the entire balance is due when you reach the end of your term.
Like most Canadians, you probably won’t pay off the mortgage for several years. So in this instance, you have a few options available.
Most banks and finance companies will allow you to renew your mortgage. At the end of your term, your lender presents you with a new set of terms and interest rates. These terms and interest rates will apply for the next contract period.
How Higher Interest Rates Impact Mortgage Renewal
Over the past 12 months, interest rates skyrocketed. If your mortgage matures this year, you will probably face the highest interest rate since you bought your home.
As a result of these higher rates, your monthly payments could go up when you renew your mortgage. Additionally, you will pay more interest and build equity slower.
If you’re not prepared for monthly payments a couple of hundred dollars (or more) higher than what you pay now, read on. There are several ways to manage your monthly payments when your loan matures.
4 Ways to Manage Your Monthly Payment at Renewal
The prospect of higher monthly costs worries many Canadians. Some can’t afford higher payments. Here are some tips to help you manage your payment at renewal:
- Downsize into a smaller home
- Make a pre-payment during your maturity
- Shop for a lower interest rate with a mortgage broker
- Refinance and extend your amortization period
Downsize into a smaller home
Home prices jumped dramatically over the past 20 years. You may have a lot of equity in your home. Your mortgage renewal is a great time to downsize. You can avoid your pre-payment penalty by lining your closing up with your maturity date.
If your monthly payments are likely to increase with your renewal, having a smaller or no mortgage might be best.
Make a pre-payment during your mortgage renewal
If you have some savings set aside, making a pre-payment to reduce your balance at maturity lowers your monthly payment.
This strategy is highly beneficial if you have money in a savings account that earns less interest than you pay on your mortgage.
For example, 2% interest on $20,000 is $400 annually. If you have 20 years remaining on your loan, $20,000 costs $1,072 in the first year alone. As you can see, applying these savings as a pre-payment saves $672 and lowers your monthly payment by over $135 each month!
Shop for a lower interest rate with a mortgage broker
Did you know you don’t have to renew with your current lender? In fact, banks and finance companies compete for your business and will often pay the costs to switch to a new lender.
A mortgage broker works on your behalf to find you the best mortgage suited to your long-term needs. As a side benefit, lenders pay them for their services. Therefore, they provide you with advice at no cost to you.
Most brokers have access to dozens of lenders. Using their contacts, they help you save money by negotiating a lower interest rate.
Refinance and extend your amortization period
Another solution to lower your payment is to refinance and extend the amortization. This term refers to the time it will take to pay off your loan when making minimum payments.
Keep in mind, when you increase the amortization during your maturity, you’re also increasing the amount of interest you will pay over time.
You can use this as a short-term solution to lower your monthly payments. As interest rates decrease, you could refinance and choose a shorter amortization period to ensure you pay off your mortgage in your desired timeframe.
If your mortgage renewal is in the next twelve months, the time to start researching your options begins now.
Contact a mortgage broker to see what your monthly payments could look like at maturity. If the payments are too high, explore one of the following solutions to manage your cash flow:
- Make a pre-payment
- Shop for a better rate with other lenders
- Refinance and extend your amortization
Would you like some advice on your upcoming mortgage renewal? Email me at email@example.com with the word “Renewal” in the subject line.
About the Author
The column's goal is to level up your financial knowledge and help you avoid common pitfalls and mistakes along the way. Although money management sometimes seems like an intricate task, it doesn't have to be. The advice here is common sense and simple to follow. The first step to a better financial future starts here, and it's never too late to begin. Adam Stapley is a Mortgage Broker with Pineapple Financial and author of the personal finance Newsfeed CanadianFinanceGuide.ca. He is intensely passionate about helping Canadians build wealth through the power of real estate. Many of the articles in this column come from Adam's experience assisting Canadians to understand and shape their personal finances. Pineapple Financial Lic #12830 CanadianFinanceGuide.ca firstname.lastname@example.org