When you secured your mortgage, you were so excited to find and move into your dream home. Everything was looking rosy and then mortgage interest rates started going up – and up. A variable-rate mortgage seemed like the best option at the time but now you’re worried. The past year witnessed a series of seven interest rate hikes for Canadians, with two additional ones already having happened in 2023. For those holding variable-rate mortgages, the speed at which mortgage payments have surged is scary.
As an illustration, consider a homeowner shouldering a $500,000 variable-rate mortgage over a 25-year repayment plan. Throughout the preceding year, their monthly mortgage expenses escalated by over $1,000. While Canada has experienced a relatively low rate of mortgage defaults so far, bankers are sounding the alarm, cautioning that a substantial number of mortgage holders – potentially tens of thousands – could be at risk, given the prospect of further interest rate increases.
There are no easy solutions if you find yourself in this situation but you do have options, other than defaulting on your payments.
Talking to a professional mortgage broker like myself, Darren Robinson is a good first step to finding out what will help make your mortgage payments more manageable for you and your family. For example, below I have listed a few mortgage solutions you might look at to make the weight of your mortgage a little easier to carry and know that if you have questions, I’m always here to answer them. It’s my mission to not only help you secure the mortgage you need to maintain your family home or rental properties but, to help you plan for the best financial future at the same time.
You Could Extend Your Mortgage’s Amortization Period
Extending your amortization schedule, or the time it takes to pay off your mortgage, will lower your monthly payments. Yes, a longer amortization will cost you more interest in the long run, but if you’re worried about your monthly bills now, this is a solution to consider.
In order to extend your amortization we would look at applying to a support program. To qualify for this program your mortgage would have to be insured through CMHC (or one of the other two insurers). If you have mortgage insurance, you may also be covered for a default payment not that you want to ever default on payment but, you have insurance in place should it happen.
You Could Convert To A Fixed-Rate Mortgage
The tricky thing about interest rates is that no one really knows for sure where they’re headed. If you switch your mortgage to a fixed rate, it might cause you to stretch your budget right now, but at least you’ll know for sure that your mortgage payments won’t increase any time soon.
However, if interest rates start to drop, being locked into a fixed mortgage rate may negatively impact you. And remember that if you break your mortgage, there will be penalties and fees, unliked a variable rate mortgage. This option may not give you any immediate budget relief but, it will give you peace of mind that future interest rate hikes won’t stress your budget further.
You Could Consider a Shorter Term Mortgage
The most recent economists’ outlook predicts that the Bank of Canada will start reducing their overnight lending rates in mid-2024. This puts people who need to renew their mortgage in quite a predicament. If they sign up for a new five-year mortgage term, they could potentially lock in when interest rates have peaked.
Ultimately, no one has a crystal ball, but if you are worried about locking in today’s rate for the next five years, you could consider a shorter term of just one or two years. Your interest rate would be higher than a five-year term, but at least it’s only for a couple of years. If you can handle a temporary increase, you’ll be able to reassess your options sooner, without having to pay any penalties when you’re up for renewal to take advantage of rates when they start to drop.
You Could Consider Refinancing Your Mortgage
Another viable option is to consider refinancing your mortgage. This would allow you to pull some money out of your home to be used for cash-flow or debt payout purposes. This would also allow you to extend your amortization (up to 30 years). On the negative side, you would need to absorb a penalty using a portion of the refinance funds. You would also incur new legal closing fees and have to obtain a property appraisal. In the long term, this would be a more expensive option but in the short term, it could provide some cash flow relief if debt from credit cards or other loans are stacking up against you.
If you’re a homeowner, it’s a smart money move to familiarize yourself with your mortgage options in case you run into trouble making your mortgage payments. As a financial advisor and Accredited Mortgage Professional, I can offer you advice about a variety of options that can help with your financial situation. You should also know that it is free to work with a mortgage broker and that I have options to offer you that the banks don’t. Whether or not you are feeling the pressure give me a call today at (705) 315-0516 or click here to book a consultation with me if you want to discuss what options are available to you should you need them. Together we can find ways to get you through this home-owner mortgage crunch so that your dream home will remain your largest investment.