With interest rates skyrocketing since March of 2022, if your renewal is looming this year and you’re worried – read on.
It seems that the times of historic-low interest rates are behind us – for the foreseeable future anyway. So what happens if your mortgage is due for renewal in 2023? Maybe you are one of the lucky ones to lock in a 5-year rate at 2.0% or less over the last two years, and you don’t have to worry about it yet, but there are plenty of homeowners who have a deadline looming this year.
Let’s look at the numbers. If you have a $500,000 mortgage you took out 5 years ago at a rate of 3% (about the best rate you could get in early 2018), your monthly payments would have been around $2366 (assuming a 25-year amortization). Your outstanding balance on your mortgage in 2023 when the term comes up for renewal would be around $427,000, with 20 years remaining on your amortization. At today’s rate of around 5%, your payments would be around $2800. Obviously every situation is unique and this is for illustration only, but there are some people that are right to be worried about an upcoming renewal in this interest rate environment.
For some expert advise, I reached out to local mortgage professional James L. James of Dominion Lending Centres – Modern Mortgage Group. I asked James if he had some ideas for homeowners worried about how they would afford their payments.
- “Extend your amortization: I know the thought of extending an amortization can be scary as no one wants to take longer to pay down their mortgage but you should keep in mind that the amortization length is an arbitrary time frame used to determine monthly payments. Most lenders do permit annual lump sum payments or increased monthly payments, both of which essentially reduce amortization length. You can also reduce the amortization back down at a later date when rates have improved. For example, if your current remaining amortization is 20 years, by extending to 30 years you could save approximately $125 per month per every $100,000 of mortgage funds.”
This seems like the most logical. You’ve just paid off 5 years of your mortgage – why not just extend out the amortization to lower your overall payments. You can always refinance if rates eventually fall, or make lump some payments as you have available cash to do so.
- “Switching your mortgage type: If you are currently in a variable rate mortgage, it might be advisable to switch to a fix term. Currently fixed rates can be up to one full percent lower than variable. And this may increase further if variable rates continue to increase, which is expected. However if you are going to opt for this option, it might be advisable to take a shorter term so that you are not locking into historically higher fixed rates for a long period of time. This all comes down to your level of tolerance for uncertainty though and you definitely want to speak to your mortgage professional about which option is the best for you”
Here in January 2023, the Bank of Canada is expected to make at least once more increase of 0.25 or 0.5% to the overnight rate, which affects variable rate mortgages, so switching to a fixed rate product, in addition to peace-of-mind, might save you some money, too.
- “Reverse Mortgage: If you have built up a decent amount of equity in your home and are at an age where you do not necessarily want to deal with mortgage payments and all the turmoil we are sure to see in the rate market moving forward, a reverse mortgage might be the best option for you – especially if you live in an area that has a long term trend of increasing property values. These mortgages will eliminate your payments entirely, as they will simply be taken from the existing equity in your home. You can also opt for a lump sum payment to be issued to you, or receive a monthly stipend, from certain reverse mortgage options.”
There’s an interesting and creative idea I am sure not a lot of people have thought about. Being a guy in his 40’s a reverse mortgage isn’t something I could or would consider, but seniors, especially those on fixed or limited income, could definitely take advantage of such an option, assuming it aligns with any estate planning in place.
- “Flex Mortgage or Home Equity Line: Flex mortgages and home equity lines of credit offer a way of reducing your monthly payments by making a portion of your mortgage interest only payments. With a home equity line, you can also use this as an option to assist with your monthly payments on months you might be a little bit short – as you can draw from it and pay it down any time you like. However, home equity lines of credit do tend to come with higher rates than standard closed options and are not for everyone.”
One must be careful with HELOCs – besides the higher rate, if you’re not disciplined, you can end up dipping into your home’s equity too much – and in a market where property values are dropping – you don’t want to end up underwater (owing more than the home is worth).
- “Talk to a mortgage broker: Unfortunately we see this far too often. Clients open up a savings account with a lender when they are a child and for the rest of their life, that is their bank. I did it myself until I got in this industry. Banks are often the least competitive for people they assume are “theirs”. I have been able to save clients tens to hundreds of thousands of dollars in interest by shopping around their mortgage, and the vast majority of the time, if they so choose, the clients can keep all their existing day to day banking exactly the same. At the end of the day, banks make more than enough money and your goal should be to keep as much of your money as possible in your own pockets. So make that quick call to me or your mortgage broker and see what other options are available to you before you sign on any dotted line.”
This is the best advice here – your bank’s job is to make money for its shareholders. Your mortgage broker’s job is to find you the best deal and to support you in your mortgage decisions. They’re not just brokers – they are advisers – and who among us couldn’t use sound advice when dealing with financial matters?
- “Can any other loans be paid down? Often additional debt loads can be reduced through a refinancing of your property. If you have any high payment credit cards or other loans, by amortizing them into the mortgage your overall monthly payments will drop significantly. In the future, if your disposable cash increases, you can always use this to pay down to principle to reduce the overall long term interest you would be paying by doing this. In the past we have saved clients thousands in overall monthly expenses by consolidating additional loans into their mortgage, which generally is at a much lower rate than any other type of borrowed capital.”
If your problem is available cash flow – this option may work for you. One thing to remember is that refinancing higher-interst debt into your mortgage is not a “get-out-of-debt-free card.” If you don’t possess the financial discipline to avoid running up the credit cards again, this option is not for you.
- “Finally, you might want to look at utilizing unused space in your home. I know we all value our privacy, but being someone that works with numbers and finance, I always encourage clients to consider their long term financial health. Sure, that friend or family member that is currently paying too much for rent somewhere might get on your nerves occasionally, but maybe that annoyance is worth the monthly sum you could be receiving from them to stay in an otherwise vacant room. Building your inner circle and sense of community is always a good thing and something we probably need more of nowadays.”
Another option related to this is a homestay/exchange student. If you already have kids that you care for, a student can not only enhance your childrens’ cultural awareness, but the marginal effort and cost of providing an extra helping at the table is often well worth it. I know families that have made lifelong connections with the students they host – and continue to keep in touch as they become young adults.
As you can see – there are always options when it comes to mortgages. So have a chat with your trusted financial advisers and make a plan before a plan is made for you. If you bought or renewed in 2020-2022 at a super-low rate, you also need to make a plan for what happens when you renew a few years from now. Rates may come down, but it’s unlikely we’ll see below-2% mortgages. Set aside some extra cash to make a lump sum payment to reduce your balance, make extra payments as you can afford them – so that when your time comes to renew you aren’t left in a sticky financial situation.
I wish you all the best for a happy and successful 2023 – don’t hesitate to get in touch with any real estate related questions, I am here to help.
-Tim Ayres, REALTOR® 250-885-0512 (voice/text) tim@timayres.ca