What to Consider at Mortgage Renewal

Over 180,000 Canadian mortgages are up for renewal this year. With many homeowners already facing the challenge of balancing car payments, monthly bills, and the important goal of saving for retirement, your mortgage renewal can be an opportunity to reevaluate your financial situation and goals.

Let’s review six things to consider at mortgage renewal.

1. How Much Equity Do You Have In Your Home?

Many Canadians hold equity in their homes. Home equity is the difference between the market value of your home and how much money you owe for it. For example, if your home’s appraised value is at $500,000 but you owe $200,000 on the mortgage that means you have $300,000 in equity. At renewal, you might decide to take out a mortgage for $250,000 instead of the $200,000 you owe. You would then have $50,000 in equity at your disposal.

Home equity can be a powerful tool to enhance your savings and overall financial status. These are two examples of how you can leverage your home’s equity at mortgage renewal:

A. Borrowing Money to Invest: If you have enough equity in your home and unused contribution room in your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), you could consider using some of your home’s equity to invest directly into your RRSP or TFSA.

This is also a great way of diversifying your investment portfolio. Rather than just having home equity, you could also have investments in stocks, bonds, mutual funds, or even Guaranteed Investment Certificates (GICs). Having a variety of financial assets is generally recommended, because it allows you to better withstand market changes and reach your financial goals sooner.

B. Debt Consolidation: Another option at mortgage renewal involves using your home equity to consolidate high-interest debts, such as credit card balances or car loans, into your mortgage. Often the interest rate of your mortgage is less than the interest rate on your credit card, car loan, or line of credit (yes, even with the current market conditions that statement is true for many Canadians!). By using equity in your home to pay off high-interest debts, you can save interest charges in the long-term and improve your monthly cash flow.

2. Fixed-Rate or Variable-Rate Mortgage?  

With each mortgage renewal comes the age-old question, do you get a fixed-rate mortgage or variable-rate mortgage? The answer will depend on a number of factors including the amount of equity you have in your home and your comfort level with market fluctuations. Can you handle changing payment amounts or would you prefer to know your payment amounts upfront for the entire term?

Here’s a look at both mortgage types:

A. Fixed-Rate: The majority of Canadians choose fixed-rate 3 or 5-year mortgages when buying a home or renewing their mortgage. Many point to the peace of mind and financial stability that they get from knowing what their payments will be and being able to budget accordingly.

B. Variable-Rate: Unlike fixed-rate mortgages, Canadians with variable-rate mortgages are susceptible to market fluctuations. There are two types of variable-rate mortgages: adjustable payment and fixed payment.

B.1. Variable-Rate Mortgage with Adjustable Payments: With adjustable payments, your payment fluctuates with the Bank of Canada’s (BoC) lending rate. That means if the lending rate goes up your payments increase as well so that you are continuing to pay down your mortgage at the same pace.

B.2. Variable-Rate Mortgage with Fixed Payments: With a fixed payment variable-rate mortgage, you have to reach a “Trigger Rate” before your payments increase. A trigger rate is reached when the allocation of your mortgage payment is 100% interest and 0% principal.

When the Bank of Canada began making rate increases in 2022, homeowners with variable-rate mortgages were immediately impacted while those with fixed-rates will not see the impacts of these increases until their renewal.

3. Are You Looking to Buy a New Home?

As your mortgage renewal approaches, it is important to consider your long-term goals. Do you see yourself staying in your current home for another five years? Are you thinking about downsizing or conversely, starting a family?

Mortgage renewal might be the ideal time to move because you will not have to pay a penalty for breaking your mortgage mid-term. The amount of the penalty will vary based on the mortgage company and how much time remains on your mortgage’s term, but it is always nice to avoid having to pay extra fees. So if you are considering making a move, renewal is the time to explore your options.

We strongly suggest working with a mortgage broker to get pre-approved for a new mortgage. You might even find during mortgage pre-approval that the value of your current home has increased and will provide you with equity that you leverage to get into a larger home.

4. Should You Extend Your Amortization Period?

An amortization period is the amount of time it will take to fully payoff your mortgage through pre-determined and regular payments. An amortization extension, on the other hand, refers to any period beyond your initially qualified amortization.

Federally regulated prime lenders typically do not offer amortization extensions beyond 30 years. However, at renewal if your current mortgage has a shorter amortization period – for example, 15 years – you can extend it. This will lower your remaining payments because you will be making payments over a longer period of time. However, you might pay some additional interest during that time, but some homeowners find it helpful for their monthly budgets to extend their amortization period.

Alternative mortgage lenders, often referred to as “non-bank” or private lenders, may offer amortization extensions of 35 to 40-years, provided you have at least a 20% down payment or more than 20% home equity built up.

5. How Can You Accelerate Your Mortgage Payoff?

On the other hand, if you are hoping this mortgage renewal is the last and you plan to be mortgage-free in the near future, it is wise to consider strategies to accelerate your mortgage payoff.

One of the most effective ways is by making additional payments toward your principal. One-time lump sum payments are a great strategy that can dramatically shorten your loan term and save you interest.

Each lender varies with how often and how much money you can pay towards your principal. If your lender gives you the option though and it aligns with your financial goals, we recommend putting money from tax refunds, work bonuses, or additional cash flow towards your mortgage principal.

6. Don’t Forget to Shop Your Mortgage!

According to a 2022 Leger survey from RATESDOTCA and BNN Bloomberg, 52% of respondents said they did not consider shopping their mortgage rate at renewal. Although 9% also admitted they did not realize that changing lenders was even an option.

We are here to remind you that shopping your mortgage rate and conditions at renewal is an important consideration – don’t just let your mortgage renew automatically with the same company! In fact, your prior lender may not offer the best rate in the marketplace; afterall, they are just focused on retaining your business, not competing for it!

By working with a licensed mortgage broker, they can shop the mortgage market for you and find you the best options for your unique situation.

Conclusion

There are many factors to consider when it comes time to renew your mortgage, and the right choices for you will vary based on your financial situation and future goals. That being said, don’t delay! It is recommended that you start looking at rates approximately six-months prior to renewal so that there is ample time to secure your new mortgage.

Looking for help navigating your mortgage renewal? We highly recommend working with a mortgage broker who can shop the market for you, finding you the best deal and terms for your lifestyle.

In fact, we have a mortgage broker right here at Excalibur Insurance! Christopher Burton is a licensed Financial Security Advisor and Level 1 Mortgage Agent with over 31 years of experience. He works with over 50 federally regulated mortgage companies and has helped hundreds of families find the right mortgage for their needs.

Interested in a quote or just a conversation to get advice for your upcoming mortgage renewal? You can book an appointment with Christopher using the button below.