When you took out or renewed your current mortgage, your situation was probably different from what it is today. Since then, maybe you've taken on new projects requiring a review of your budget, or the changing interest rate environment means you'll need to make bigger payments the next time you renew your mortgage. Take a moment 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're possibly spending a larger share of your income on certain budget items, like groceries and transportation. Between the money you have becoming in and going out, how much can you now devote to repaying your mortgage?
If you're repaying high-interest loans, like a credit card balance or personal loan, your mortgage renewal could be a good time to consolidate your debt. Ask your advisor about this option. You could end up saving on interest and better balance your budget.
Can you afford to make a lump-sum repayment on your mortgage?
When renewing a mortgage, the loan is open, meaning you can repay it without any limits or penalties. In other words, you can pay whatever lump sum you want. If you stand to get a tax refund or a bonus, you can use some or all of the money to pay down your mortgage balance. Another option, available mid-term, is to pay back up to 15% of the initial mortgage amount penalty-free per calendar year. Is it better to add to your savings or pay off your mortgage faster? Talk to your advisor so you can make informed decisions.
2. Consider the goals you want to achieve over the next 5 years.
Different life events can affect what type of mortgage to take out, for example selling your home or making major purchases. 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 home renovations or buying a second home. Your advisor can discuss the available options with you and help you decide if mortgage refinancing is the right choice for you.
3. Choose a mortgage that's right for your new situation.
Renewing your mortgage is a good time to check if the terms and conditions 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.
Fixed or variable mortgage rate?
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 important thing is to choose something that you're comfortable with and that works for you.
A fixed rate gives you peace of mind because it stays the same for the entire term. Any rate hikes during this period won't impact the repayment of your mortgage balance. On the other hand, if rates go down, you'll have to wait until your next mortgage renewal to secure a better rate.
If you opt for a variable rate, any fluctuations in the interest rate will affect how much of the principal you repay. Because the payment amount is fixed, a lower rate means you'll be able to repay the principal faster than if rates go up. While this option may save you on interest in the long term, you should evaluate the potential savings in the event of a rate cut, as well as how much risk tolerance and budget wiggle room you have in case rates go up.
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.
How long will the mortgage term be?
The mortgage term establishes the duration of the mortgage agreement. A long-term mortgage gives you more stability, whereas a closer maturity date gives you the opportunity to negotiate new terms and conditions sooner. This enables you to more readily take advantage of more favourable economic conditions, such as a rate cut.
If you plan to move or sell your home in the near future, you may want to opt for a corresponding mortgage term or an open loan. That way, you would avoid any applicable penalty charges associated with changes to your mortgage that don't honour the terms and conditions of your agreement.
What payment frequency should you choose?
It's up to you to decide how to repay your mortgage: weekly, every 2 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 2 weeks (rather than monthly) will reduce the time it takes to pay off your mortgage balance. Your annual interest charges are spread out over a larger number of payments and according to an accelerated timeline.
Want to change the amortization period?
In some circumstances and under certain conditions when renewing your mortgage, you have the option to shorten or extend the amortization period, which is the number of years it takes to pay off the mortgage in full. If you need to take some pressure off your budget over the short term, you can extend the amortization period to reduce your regular payment amounts. However, this will increase your total borrowing costs. Before deciding on this approach, you should explore other available options with your advisor.
Protect your mortgage with Loan Insurance
Consider what would happen if you were to fall ill or get into an accident, forcing you to stop working for an extended period: Would you still be able to meet your financial obligations? If you haven't already done so, when you renew your mortgage, you have the option to take out Loan Insurance. In the event of your death or disability, this will protect one of your most important assets.
4. Estimate your future mortgage payments and adjust your budget accordingly.
Use our mortgage payment calculator to get a better idea of the mortgage payments required based on your financial situation. Assess the remaining mortgage balance at the time of renewal, and calculate your upcoming mortgage payments.
You can also book an appointment with an advisor to discuss several different scenarios. The advisor can help you choose a mortgage that's right for your risk tolerance and, if required, adjust your monthly budget accordingly.
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.
Your mortgage renewal is a good time to reassess your situation and reorganize or improve your finances. Keep in mind that it's best to be prepared, and feel free to ask for help from your advisor. This will help you make informed decisions and renew your mortgage, either online or at your caisse or branch.