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With inflation running at generational highs and interest rates on the rise, many debt-strapped Canadians are struggling to reorganize their finances.  The next challenge is their mortgage renewal that might be coming up in 2023.  By understanding the mortgage renewal process and preparing in advance to pay a potentially higher interest rate, both you and your mortgage will be set up for an easier transition.

Client First Mortgage Solutions Mortgage RenewalHigher interest rates could drive payments up significantly

In an attempt to slow decades-high inflation, the Bank of Canada has increased its overnight rate rapidly in 2022.  This has had a direct impact on borrowers, since lenders typically increase their prime rates as the Bank of Canada increases its overnight lending rate. The Bank of Canada’s  overnight rate  is currently at 3.75%.  Another increase is expected before the end of the year.

Before these interest rate increases, it was pretty common to find mortgage rates below 2%.  Now, both fixed rate and variable rate mortgages are hovering around 6%.

You may hit your trigger rate before you renew.

If you have a fixed payment variable-rate mortgage, recent interest rate increases may not have worried you too much, since your payments haven’t increased.

Generally, there are four things you can do in this scenario.

  • Increase your payments
  • Make a prepayment
  • Switch to a fixed-rate mortgage

Take time to review your mortgage contract, as your trigger rate should be clearly listed in writing.  If you’re still hazy on the details, don’t hesitate to contact your lender and ask any questions you might have about your trigger rate.

No re-qualifying unless you change lenders

A few weeks or months before your mortgage term is set to expire, your lender should send you a mortgage renewal statement, that outlines your remaining mortgage balance and lays out a new mortgage offer, which will include:

  • A new interest rate
  • Payment frequency
  • The term
  • Any changes or fees that apply

Typically, it’s best to compare your current lender’s renewal offer with those of other mortgage lenders, since there may be better deals out there that could save your money.  But if you decide to switch lenders, you’ll need to re-qualify as a borrower.  This will include passing the mortgage stress test when interest rates are painfully high.

But if you accept the mortgage renewal terms offered by your current lender, you won’t need to worry about re-qualifying.  Accepting the renewal offer can be advantageous to people who, for various reasons, are in a difficult financial situation and might not be able to qualify with a new lender.

Choosing a shorter term could be beneficial

Whether its a fixed or variable-rate mortgage, most Canadians typically choose a 5-year term.  But mortgage rates may rise further in 2023, so it could be time to consider a shorter term instead.

With a shorter fixed-rate term of one to three years, you’ll be protected if rates go up.  And, because you’ll be locked in for a shorter period, you’ll be in a position to take advantage of lower rates – if the market adjusts in your favour – without breaking your contract.

With variable-rate mortgages, you’re still facing the same rate risks no matter what length your term is.  If you opt for a shorter term, you could enjoy a bigger rate discount when you renew, but you might also have to withstand more rate increases before the Bank of Canada begins drawing down the overnight rate.

Shopping around is worth it

If you have a stable income and decent debt service ratios, there’s no reason to accept your lender’s mortgage renewal offer right away.  Your best bet is to shop around and compare it to the mortgage rates available elsewhere, or contact your mortgage broker for this information and the best option available for your circumstances.  You can always use this information to try and negotiate a better deal with your current lender.

Before you switch lenders, keep in mind that there may be additional charges to factor in such as:

  • Setup fees
  • Discharge or transfer fee from your current lender
  • Appraisal fee
  • Removal of collateral charge

While these fees are common, a new lender might be willing to pay for some or all of them to win your business.  It never hurts to ask.

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