Having a mortgage renewal soon? Find out how to ease the future hit from higher rates

This year, interest rate hikes have been so sharp that Canadian homeowners who are facing a mortgage renewal during the next 6 months may deal with larger payment amounts even if they have been paying towards their principal for some time already. 

For many years, we’ve seen borrowers renewing their mortgages either at a slightly higher rate or at a significantly lower one. However, now the sharply growing rates will lead to much higher borrowing costs when they renew. 

Let’s look at the hypothetical situation. A person bought averaged-priced property in Toronto for $822,000 in July, 2017. A borrower provided a 20% down payment and got an amortization period of more than 25 years. A monthly payment in this case was $3,008.

Today, after 5 years of making payments, the borrower’s debt went down to $558,694. In case of renewing this month, the borrower may get a competitive rate of 4.59%. As a result, the monthly payment will go up to $3,548, marking a monthly increase of $540 and an annual hike of  $6,480.

Many clients worry about facing larger payments if the have a renewal this summer or in 6 months. Almost 17% of mortgages in Canada are renewed each year. And about 85% of them have a five years term. 

If you have a mortgage renewal during a year from now, you may begin to adjust your budget right now. For instance, if you see that your monthly payment may go up by $200 or $500, you could start setting aside this amount in a high interest savings account. That way you will be ready for the future increase in spending. Moreover, the savings you’ve built during this time will be a useful cash cushion.

One more option for those who have low cash flow is increasing the amortization – a period during which you need to pay your mortgage down fully. If you have been paying towards your principal, you can reduce the amount of monthly payments and slow the pace of paying off. 

Changing the amortization requires a mortgage refinancing. Nevertheless, you may also benefit from shopping around and searching for the best rate available.

As we’ve mentioned before, an economic decline may bring the rates back to the previous lows. Growing concerns over a potential recession in the bond market are already affecting fixed mortgage rates.