Your mortgage is coming up for renewal, interest rates are high, and you’re wondering what you’re going to do. Should you renew or refinance your mortgage? Is there a way to get a lower rate? Fixed or variable? Is there anything else you should be considering? There are a lot of important decisions to be made, and in times of high interest rates, the decisions you make could have long-lasting effects on your finances.
Equipping yourself with knowledge about your options should be your number 1 priority! That naturally entails starting your research early and shopping around. In this article we’ll dive into the question of mortgage renewal vs refinance, especially when interest rates are high. So take a deep breath (or two, or three) and read on to start building your action plan. Let’s start with mortgage renewals.
A mortgage renewal means you will be staying on with your current lender for another term. You will need to negotiate your interest rate and the length of the term, and that’s where the problem comes in. With interest rates so high, there’s little doubt that you’ll be paying considerably more going forward, than you have previously. But there are options to help mitigate the pain.
You may receive an early renewal offer from your lender — possibly 4 to 6 months before the renewal date. But that doesn’t mean you have to take it. Shop around, go to other financial institutions and lenders to see what they can offer you. If you find a better deal, get a rate hold which will protect the rate from increases, typical rates holds are for up to 120 days out. You can then either accept it once you’ve finished looking at all the options and variables or use it to negotiate a better rate from your current lender.
Remember that interest rates are only one component of a mortgage deal. Pay attention to fees that could offset what you save in lower interest rates. Also look at the flexibility of the mortgage. Will you be able to transfer the mortgage to another property if you move? What happens if you need to break or refinance, are there penalties if so how are they calculated, as all lenders don’t’ do it in the same way? Can you prepay a portion of the mortgage without a penalty, if so how much? As you can see a mortgage is about far more than just a rate!
A mortgage broker can be an important ally at this stage. They’ve got both knowledge and access to a myriad of products from a wide variety of lenders, both ones that are household names and others that aren’t. They will be able to compare different mortgage offerings, ensuring that you ultimately wind up with the best solution both in terms of rates and features specific to your individual financial situation.
Fixed rates are usually higher than variable rates, though at the present time, they are actually slightly lower. One of the benefits of a fixed rate is the peace of mind knowing what your payments will be for the length of the term. Of course, that peace of mind may be shattered if interest rates suddenly drop dramatically and you’re stuck in a high interest rate mortgage. Fixed rate mortgages often come with higher penalties for breaking the mortgage, so this is something to consider in these uncertain times.
A variable rate fluctuates in response to the Bank of Canada’s overnight rate. Depending on your mortgage, this will result in changes to either your monthly payments or your amortization period. Variable rate mortgages are usually easier to break with lower penalties. Most lenders also will allow you to convert to a fixed rate at any time without any penalties, provided you take a fixed term equal to or greater than what’s remaining on your variable term.
There are also blended rate mortgages, where part of your mortgage has a fixed rate, and part has a variable rate. If the Bank of Canada’s overnight rate, and hence the prime rate, changes, only the variable portion will change and the fixed portion will remain the same.
In the final analysis, whether you go for a fixed, variable, or blended rate mortgage, it should be based on your particular situation and your risk tolerance.
This is a question that relates mainly to fixed rate mortgages, since they offer much less flexibility than variable rate mortgages. Is it conceivable that the interest rates will go even higher, or have we reached the peak? If interest rates drop and you’re locked into a long-term mortgage with large penalties if you break it, you might not really have an option but to stay the course. A shorter term of 2 or 3 years might be a better option in volatile times, depending on your personal financial situation.
If you stay with your current lender and are not taking out any additional funds or increasing your remaining amortization, you won’t need to do the mortgage stress test again. However, if you find a great deal and want to switch lenders, be aware that you will most likely need to go through the mortgage stress test as if you were a new borrower. The lender will look at your income and your debts to make sure you will be able to meet the mortgage payments based on the greater of the Bank of Canada stress test rate or the actual mortgage contract rate plus two percent.
The one exception however is for hi-ratio insured mortgages where the borrower paid the mortgage insurance premium. So if you originally had less than 20% down when you purchased your home and paid the mortgage insurance but haven’t ever refinanced to take out equity or increased the amortization, then a new lender considering your mortgage application can waive the stress test for qualifying purposes and will qualify you on the actual mortgage rate they can offer. Which ultimately means more potential options and savings for you!
More creative options to deal with high interest rates such as tiered mortgages or lengthening the amortization period, will require a new loan and this is called refinancing.
Refinancing means replacing your current mortgage with a new loan based on the net worth of your home — the difference between its current market value and the remaining balance on your mortgage. When refinancing your mortgage, you could negotiate a deal that eases the financial stress by modifying the mortgage structure. For example, a long amortization period from 15 to 30 years will substantially lower your monthly payments (keep in mind though that your overall interest cost will be higher, as longer amortizations result in higher overall interest costs). Some lenders allow you to split mortgages into separate components, which divides the principal into a few pieces with fixed or variable short terms of one to five years. That means that every year or so, a portion of your mortgage will come up for renewal, for those who choose to do this they’re hoping to take advantage of any potential drop in rates.
But perhaps the best use of refinancing is to leverage the equity in your home to increase your revenue. For example, if you use the equity to finance renovations that result in a rental suite in your basement, you’ve not only increased your property’s value, but you will also gain a new revenue stream.
Of course, the benefits of refinancing should always be balanced against the disadvantages, namely penalties for breaking your mortgage.
Talking to your mortgage broker should be near the top of your list when you start your research into the mortgage renewal vs refinance options. A mortgage broker will help you assess your current financial situation, where you expect to be in five years, and will be able to suggest mortgage products that give you the best rates and features for your circumstances.
Are you ready to begin your research? Give us a call and we’ll talk.