New strategies for mortgage renewal amid current high interest rates

Today’s interest rate conditions are drastically different from what we saw only a year ago, and it means borrowers need new strategies for their mortgage renewals.

The real estate market has never faced such a sharp increase in the overnight rate during such a short period of time. It has left variable-rate clients with much higher rates than a year ago, while fixed-rate borrowers have to cope with significantly higher renewal rates.

For many years our clients have been asking us about the pros and cons of 5-year fixed and 5-year variable. Today, because of the drastic hike in the central bank’s key lending rate (from 0.25% at the beginning of 2022 to 4.5% in less than a year) we need to change our strategies and the advice we can offer to clients at renewal.

One of the main changes is that the 5-year term is no longer a default option.

Everything points to the potential rate declines during the next few years, and if you want to take that risk, you might want to think about a two- or three-year term.

Regardless of whether you’re sure about a rate decrease over the next 2-3 years or not, we don’t recommend a variable rate now. The deal is that variable-rate mortgages are unusually higher than fixed rates (even with a 2-3-year term), but penalties for breaking the term are almost similar.

One of the ways Canadians are coping with the high rate environment is by switching to a new lender.

There are more clients at renewal who want to change their lender instead of staying with the initial one. Such transfers are becoming more popular, especially in case they are insurable, meaning they will get a lower rate usually than what their existing lender can offer.

However, you need to understand that with such transitions you will have to re-qualify under the mortgage stress test, which means qualifying at 5.25% or your contract rate plus 2% (the higher one is chosen).

Another interesting trend we are currently noticing is taping into accumulated equity by adding home equity credit lines at the time of renewal. For example, we can arrange you mortgage transfer at the best rate and add home equity line at maturity which give you access to funds at anytime without breaking your mortgage and paying hefty penalties.