When you took out or renewed your current mortgage, your situation was probably different from what it is today. Maybe you’ve taken on new projects and had to review your budget, or the changing interest rate environment means your payments might increase the next time you renew your mortgage. Take advantage of your renewal period to consider the points outlined below. They should help you make the right decisions for your current situation.
1. Assess your current financial situation.
Compare your current day-to-day to the situation you were in when you took out your mortgage. What has changed?
Perhaps you got a raise, or you’re dealing with added expenses and financial obligations, such as a car loan. Due to the rising cost of living, you might be spending a larger portion of your income on certain budget items, like groceries and transportation. Lots could have changed. Now’s the perfect time to review your budget and see if you can increase your financial flexibility to help you reach your goals. Does your current income comfortably cover your mortgage payments and still allow you to plan for future projects?
If your budget is tighter now than when you first took out your mortgage, then renewal time can be a good opportunity to explore different solutions to give you more flexibility. Talk to your advisor about it. There are a number of options you could consider depending on your needs. You might want to temporarily adjust your budget, reorganize certain financial obligations or optimize your loan costs. Your advisor can help you assess the options available to you and find a solution that could increase your financial flexibility and help you reach your goals.
Can you afford to make a lump-sum repayment on your mortgage?
During the mortgage renewal period, your loan is usually open, meaning you could repay some or all of it without any limits or penalties. For example, if you get a tax refund or a bonus, you could use some of the money to pay down your mortgage balance.
During the mortgage term, and depending on the conditions of your loan agreement—especially for closed loans—it’s often possible to repay a percentage of the initial principal amount every year, penalty-free. This percentage varies by product and lender, so it’s important to verify what your loan agreement permits.
Can’t decide whether to add to your savings or pay off your mortgage faster? A strategy that combines both is often a great solution. Your advisor can help you determine the approach that works best for your situation and your goals.
2. Consider the goals you want to achieve over the next 5 years.
Life events like selling your home or making major purchases can affect what type of mortgage you should take out. Depending on your situation, your mortgage renewal may be a good time to use the value of your home to help you reach your goals, like completing some home renovations. Your advisor can discuss the available options with you and help you decide if refinancing your mortgage is the right choice.
3. Choose a mortgage that's right for your new situation.
Renewing your mortgage is a good time to check if the features of your agreement still suit your needs. You could make changes to your rate type (fixed or variable), the mortgage term, payment frequency or the amortization period.
What type of rate should you choose?
It’s difficult to predict how the economic situation will affect interest rates—especially over several years. It’s better to focus on choosing a mortgage type and mortgage rate that fit your goals, plans, risk tolerance and budget. The biggest decision is whether to go with a fixed or variable rate. The important thing is to choose a mortgage that you’re comfortable with and that works for you.
A fixed rate provides stability because it stays the same for the entire term. Any rate hikes during this period won’t impact the repayment of your mortgage balance.
If you opt for a variable rate, any market fluctuations will directly affect how your payment is split between principal and interest. A variable rate fluctuates with our prime rate. Because your payment amount stays the same, a lower rate means you’ll pay less interest and be able to repay the principal faster.
Did you know that you can combine both rates for your mortgage?
You can split your mortgage into several fixed or variable rate tranches. This option lets you take advantage of any rate cuts while at the same time reducing volatility.
But if rates go up, more of your payment will be allocated to interest. In some cases, it may be a good idea to increase your payment if it no longer covers the interest. That’s why knowing your risk tolerance is important. How much could your payment increase before your budget starts to feel the strain?
A variable rate can save you money when rates go down, but it’s a good idea to have some budget flexibility and tolerance for fluctuations in case rates rise. Your advisor can help you assess different scenarios so you can understand the potential impact of rate changes and determine the best option for you.
How long will the mortgage term be?
The mortgage term is the duration of the mortgage agreement. A longer-term, fixed-rate mortgage generally provides more stability and predictability. In contrast, a shorter term means you can reassess your financing conditions more quickly and take advantage of lower interest rates sooner.
You can always renegotiate the conditions of your loan. However, if you have a closed loan, you may have to pay a penalty if you make changes before the end of the term.
The economic climate can determine whether a shorter or longer term would be more beneficial.
You can always pay off your mortgage in full according to the terms of your loan agreement. If you plan to move or sell your home in the near future, you may want to compare an open loan (more flexible, generally lower penalties) with a closed loan (can still be repaid, but penalties may apply). Also consider whether the loan is portable and what prepayment privileges are available to limit your costs.
What payment frequency should you choose?
It’s up to you to decide how to repay your mortgage: weekly, every two weeks or monthly. A simple way to manage your money coming in and going out is to arrange for your mortgage payments to coincide with your pay dates.
If your situation allows, making payments every week or every two weeks (rather than monthly) will reduce the time it takes to pay off your mortgage balance. Making more frequent or higher payments can help pay off your principal more quickly, reducing your amortization period and the total interest cost.
Want to change the amortization period?
When renewing your mortgage, it may be possible to adjust the amortization period, which is the number of years it takes to pay off the mortgage in full.
Shortening the amortization period generally reduces your total borrowing cost.
Tip if you're expecting your mortgage payments to go up.
If it looks like your mortgage payments will be going up and if your financial situation allows, consider setting aside an extra amount right away. This amount should be the difference between your current and anticipated future payments. You'll gradually get used to living within your new budget, while saving some extra money that can go towards your emergency fund or a lump-sum payment when you renew your mortgage.
However, extending the amortization period is only possible under certain conditions and in specific situations. This can reduce your payments and take some pressure off your budget over the short term, but it will increase your total borrowing cost. Before deciding on this approach, you should explore other options with your advisor to find the solution that best fits your needs.
Protect your mortgage with Loan Insurance
Ever wondered about what the financial impact would be on your family if you had an accident or were diagnosed with a serious illness and had to stop working? Loan insurance can help take care of one of your biggest financial obligations—your mortgage. However, certain conditions, limitations and exclusions apply.
4. Estimate your future mortgage payments and adjust your budget accordingly.
Use a mortgage payment calculator to explore different scenarios and get a better idea of how your mortgage renewal could impact your finances. By running simulations with a variety of interest rates, you’ll be able to see how your rate could impact your future payments and figure out what works best for your budget.
You can also book an appointment with an advisor or start the mortgage renewal process online to compare different scenarios.
Your mortgage renewal is a good time to reassess your situation and reorganize or optimize your finances. The most important thing to remember is that it’s best to go into your mortgage renewal prepared, and that you should feel free to ask for help from your advisor. This will help you make informed decisions and renew your mortgage with confidence, either online or at your caisse or branch.