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High Mortgage Rates & How To Avoid A Cash Flow Crunch

High Mortgage Rates & How To Avoid A Cash Flow Crunch

Couple facing high mortgage rates

Are thoughts of higher mortgage rates keeping you awake at night? As your fixed-rate mortgage approaches its renewal date amid persistently high interest rates, the prospect of an increased monthly payment being withdrawn from your bank account can be scary. The uncertainty of how you will maintain your current lifestyle while managing a larger mortgage payment and staying ahead of debt, looms large.

With higher prime interest rates holding, many homeowners are grappling with the challenge of staying financially afloat. Those with variable rate mortgages are already feeling the pinch, while others await the impending renewal of their mortgage term.

How can you cope with the burden of higher mortgage payments? These are my top tips to make your monthly expenses more manageable even though your mortgage payment has increased. As an experienced mortgage broker who has seen higher rates hit the market in the past, I know it’s daunting but, I also know there are ways around a cash flow crunch.

Strategies For Combating Higher Mortgage Payments

Even though it might feel tough to handle higher interest rates, there are things you can do as a homeowner to ease some of your money worries. And, a few of these tips don’t involve your monthly mortgage payments, while others do.

First Off, Pay Down Your Other Debts

To make sure you have the money for your mortgage, consider paying off other loans and debts. Credit cards and lines of credit can become expensive over time, especially if you have high balances and no fixed rate. Making occasional large payments can also take a big chunk out of your monthly budget which is why a consistent payment instead of large lump sums can be easier to handle. Whichever you choose, paying off these debts before renewing your mortgage can help you afford any increase you might see when your mortgage rate increases a point or two.

Use Prepayments to Reduce Your Principal

Before renewing your mortgage, it’s wise to focus on reducing your principal amount as much as possible. While this won’t necessarily impact the interest rate you’re offered, it means there will be less mortgage for the bank to charge interest on, ultimately helping you pay off your mortgage sooner.

Most mortgages from A lenders permit prepayments toward the principal each year. Typically, you can either increase your monthly payment or make lump-sum payments up to a specified limit. However, ensure you follow the prepayment limits outlined in your mortgage contract to avoid prepayment penalties on any excess amounts.

Adjust Your Payment Schedule

If you’re currently making payments on an “accelerated bi-weekly” basis, you have the option to ask your lender to switch you to a “non-accelerated” payment plan. This adjustment could potentially release a few hundred dollars or more each month. Your lender permits this change without any penalties during your loan term. If economic circumstances improve later on, you can always revert to the accelerated schedule to pay down your mortgage more swiftly.

Extend The Amortization Period On Your Mortgage

Although it’s not my top recommendation, extending your mortgage’s amortization period is a method to avoid higher monthly payments. Wondering why it matters? The amortization period is the total time given to pay off your mortgage. For instance, if your current period is 25 years and you extend it to 30 years, you gain 5 extra years to make payments, thus reducing your monthly payments.

While extending the amortization period can lower monthly payments, it has drawbacks too. First, you end up making more payments, albeit smaller ones. Second, more payments mean more interest payments over time, even if the difference isn’t immediately noticeable.

Negotiate For A Better Interest Rate

It’s important that you try to negotiate with your lender when your mortgage is up for renewal. 

Lenders understand that renewing your mortgage, especially amid rising rates in recent years, can put borrowers in an uncomfortable position. Your current lender might not feel compelled to provide an appealing rate without negotiation. Even if you don’t plan to switch lenders, it’s worth exploring offers from competitors to gauge your options. Better yet, reach out to a mortgage broker like myself who can handle the negotiation process on your behalf.

Consolidate Your Debt

Another money-saving strategy is consolidating your debt by borrowing money. It seems counter-intuitive but, this combines all your debts into one fixed payment with a single interest rate, eliminating multiple high-interest debts. This not only saves on interest but also shortens the time to repay some debts as well.

There are two methods for debt consolidation loans I can help you with. One is taking out a consolidation loan to merge all non-mortgage debts. The other is consolidating all debts into your mortgage. While this doesn’t directly lower mortgage payments, it eliminates other debt payments, making mortgages more affordable and increasing your monthly cash flow. 

Get a Fixed Rate Mortgage

People with variable rate mortgages are certainly feeling the pinch of increased interest rates. Even if your mortgage allows you to maintain the same payments despite significant rate hikes, you’ll likely see less money going toward paying off your principal. 

Right now, fixed mortgage rates are lower than those for variable rate mortgages. Locking into a fixed rate mortgage, even if it’s for a shorter mortgage term, will offer stability and a better interest rate. Your mortgage lender, or a mortgage broker, can guide you on the available options tailored to your mortgage term and loan so be sure to ask about term options before signing on the bottom line.

Improve Your Credit Score

Your credit rating significantly influences the interest rates financial institutions offer for your mortgage. A higher credit score often means lower interest payments. As your mortgage agreement is renewed at the end of its term, boosting your credit score can help mitigate the impact of potentially higher interest rates.

What if You Can’t Make Your High Mortgage Payments?

While frequent missed mortgage payments can lead to property foreclosure, skipping one or two payments isn’t as dire. In Canada, you can access deferred payment plans for your mortgage, which many people aren’t aware of. However, most financial institutions limit this to 1 or 2 payments per calendar year. The best part is there are no penalties, and it doesn’t negatively impact your credit score. In tight situations, this option can be incredibly helpful if you don’t make it a regular habit.

If You’re Worried About Higher Interest Rates When You Renew, Give Me A Call & Let’s Talk Options

We’ve all seen the way mortgage rates have climbed over the last few years. If you are coming closer to a mortgage renewal, call me so that we can find the best mortgage rates and terms to reduce some of your stress over balancing your budget. Give me a call, at 705-315-0516, or book a consultation with me at this link and together we will look at all the mortgage options and interest rates available to you before that renewal notice hits your inbox.

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