As spring approaches, many Canadian families are facing mortgage renewals. With mortgage rates on the rise and the Bank of Canada increasing the overnight lending rate to counter inflation, around 1.1 million Canadian households may experience financial strain, with a third of them being variable-rate mortgage holders.
One strategy to help mitigate the strain is to connect with a mortgage broker early in the process who can provide expertise on various lender options. Another approach is lengthening the amortization period, which could make monthly payments more manageable at the expense of paying more interest over time. Opting for prepayment privileges or lump-sum payments could also reduce the mortgage's lifespan.
Being open to shorter-term fixed rates can benefit borrowers capable of affording higher rates as it reduces their exposure to the shifting market. Additionally, refinancing during renewal time might prove beneficial in reorganizing debt, changing rate types, or consolidating high-interest debts. Speaking with a professional to assess whether the advantages surpass the costs of breaking your mortgage is always advisable. Read the full article:
‘Tis the season for mortgage renewals. Spring brings about all kinds of newness- new life, vitality, new flora and fauna…and new mortgage renewals.
For those readers new to the mortgage process, or just a refresher for those who need it, Canada.ca had the following to say, “You have to renew your mortgage at the end of each term unless you pay the balance in full. You'll most likely require multiple terms to repay your mortgage in full.”
When the Climb Looks Big
There’s no doubt about it – for those Canadian families facing a mortgage renewal in 2023, we have a good news/ bad news situation for you. Let’s start with the pain first and then the pleasure.
Unfortunately, if you’re up for renewal this year, there are likely going to feel some financial sting. Mortgage rates – both fixed and variable – have skyrocketed over the past calendar year. The Bank of Canada, often referred to as the BoC is our nation’s monetary policymaker that had to increase the overnight lending rate which, in turn, increased the benchmark cost of borrowing.
Tiff Macklem, Governor of the Bank of Canada has undertaken this “fiscal belt-tightening” the result of which is a historic increase eight times between March 2022 and today from 0.25% to 4.5%, This is where it sits today. This was all done to counter rising inflation, which topped out at its highest numbers in decades, at 8 percent.
That has resulted in a higher prime rate and a dramatically tougher borrowing environment; perhaps the lowest five-year variable mortgage rate today is 5.55%, compared to the 0.9% available in the first months of 2022.
For many, that's a significant differential to financially absorb into the family finances. Approximately 1.1 million Canadian households will be facing this scenario as their mortgages come up for renewal this year, according to the Bank of Canada. Of them, about a third are variable-rate mortgage holders.
A Compass Points True North
Now for the pleasure, which comes in the form of Ms. Dalia Barsoum. The good news is that you don’t have to renew alone!
We, at Canadian Real Estate Wealth, partnered with the Founder of Streetwise Mortgages, Author of Investor Financing: 7 Secrets to Get All the Money You Want and all-around lending guru, Dalia Barsoum, for help with navigating a challenging renewal process when the lending landscape looks so vastly different.
The 5 Steps to Mortgage Fortitude:
1) Connect with your Mortgage Broker: Earlier is Better!
It’s part of the human condition to put off inevitable unpleasantries, and mortgage renewals fall into that category. However, this truly is the most important step.
Like navigating any changing topography, the key is agility. Mortgage brokers aren’t just useful when lining up a new mortgage; they’re invaluable at the time of renewal, as well. This is due largely to their vast knowledge of the products and features available from a wide variety of lenders, including A, and B, as well as the options available from a private mortgage perspective. It’s for this reason that Canadian Real Estate Wealth recommends reaching out to your mortgage broker sooner rather than later. In fact, if you’re looking to change to either a different mortgage product or lender it’s good practice to start the search 120 days out prior to your mortgage renewal.
2) Be Open to All Possibilities like Lengthening the Amortization Period
By spreading out your payments and balance over a longer duration, switching to a longer amortization lowers the amount you'll be paying each month and may make your monthly payments more manageable. Consequently, this may give you some breathing room on your family’s budget spreadsheet.
There are several paramount considerations to which one should turn their mind, though: not only will it take longer to pay off your mortgage, but in so doing, you'll lengthen the time it takes you to also create equity and realistically speaking, you end up paying more in interest over time. You can manage this via the pre-payment privileges. For example: if you go with a bi-weekly accelerated payment, you can cut down the life of the mortgage by about 4 years from its original amortization. If you also make lump sum payments, whenever your finances allow, you can reduce the life of the mortgage significantly compared to the top ups as the payment goes towards paying down principal versus the principal and interest.
3) Be Open to All Possibilities like Alternative Lending Options
Like a hiker needs a compass, we turned to someone who knows a tremendous amount about navigating the alternative lending market for her expertise. Here are the pearls of wisdom that Dalia was able to provide to us with alternative lenders or when facing challenges with existing lenders,
Alternative lenders can offer clients excellent financing solutions that are not available to them through the traditional banks. For example: extended amortizations beyond the 30 years, qualification for self-employed clients, lower credit scores, large rental portfolios and holding companies. They also offer a steppingstone to getting someone’s finances or income in order before switching back to a bank.
4) Be Open to All Possibilities like Shorter-term fixed rates
There have been significant indications from the Bank of Canada that inflation will indeed trend lower this year and next, which would relieve pressure on bonds and fixed rates, although no one had a crystal ball and consequently no analyst can state with certainty that this will be the case. For borrowers who can afford the higher rates of today but want to keep their alternatives open and reduce their exposure to the shifting market, this may be a solution.
5) Consider Refinancing at Renewal Time
Refinancing your mortgage is a good way to reorganize your debt, and you may even be able to use the equity in your property to cover higher mortgage payments and settle other debts.
Also, you might be able to change your rate type or consolidate debt with higher interest rates by refinancing your mortgage. Again, it's a good idea to speak with a professional about your alternatives because the costs of breaking your mortgage may outweigh the advantages.
We turned to Financial Maven Dalia Barsoum for what she tells her clients about the value of refinancing at renewal time. Here’s what she had to say,
Renewal time is an opportunity to reflect on where you are and revisit your plans for the short and medium term see if there is an opportunity to save, restructure certain debts to create breathing room in your monthly budget or line up equity (through secured line of credits) for extra reserves or to invest. Do not just do what is easy, which is signing the paperwork. Make time to pause, ask questions, negotiate and explore options. It is worth it.
Now is not the time to bury your head in the sand or try do-it-yourself options. Do your research and get second opinions but work with a mortgage expert to find the solution that makes the most for your family or portfolio goals. Not doing so, could be a lengthy and costly mistake.
If you would like guidance and expertise on navigating the lending environment ahead or with respect to an upcoming renewal from Dalia and her team at Streetwise Mortgages, please reach out at [email protected] or visit www.streetwisemortgages.com.