Mortgage Renewal as the Bank of Canada Continues to Raise Interest Rates

If your mortgage is up for renewal soon, you might be starting to worry that you’ll have to pay more to finance your house as the Bank of Canada keeps raising interest rates.

The Bank of Canada raised its overnight rate by half a percentage point on Wednesday, bringing it to 3.75%.

Experts say it’s time to take a step back and assess your household situation, but don’t be afraid to shop around to ensure you get the best mortgage rate at renewal.

“What you do will be determined by how tight your finances are, how close you are to finishing your mortgage, how quickly you can plan on paying it down, and what your outlook is for the economy and rates in general,” said James Laird, co-CEO of Ratehub.ca and president of mortgage brokerage CanWise Financial.

Those up for mortgage renewal may be persuaded to stay with their current lender rather than go through the mortgage stress test process again with a new lender, according to Laird.

The issue with this is that it discourages people from shopping around for the best deal. It is important to encourage people to compare prices. Even so, lots of people will pass. Five years ago, if you could pass a stress test, you probably can pass it now, he said.

The mortgage stress test was first introduced in 2016 and new rules came into effect last year, thestar.com

Mortgage Holders in Canada

Most mortgage holders in Canada have a fixed-rate or variable-rate mortgage with a term of five years or less. While borrowers with fixed-rate mortgages have generally benefited from some stability in the face of rising interest rates, those with variable-rate mortgages have felt the immediate impact of hikes, and those with fixed-rate mortgages will see their monthly mortgage payments jump significantly as they prepare to renew.

According to Ratesdotca, homeowners will likely see an increase in monthly payments of approximately 18 percent at renewal, even if they have paid down a significant portion of the mortgage and may have a higher income.

According to Laurie Campbell, director of client financial wellness at Bromwich + Smith, renewing your mortgage before the renewal date may be advantageous to lock in a lower rate, but there are risks.

Major banks and other lenders in Canada offer an early mortgage renewal option that allows you to renew without penalty before your term ends, but switching lenders or renewing before your mortgage lender’s renewal period may incur financial penalties.

“You must weigh the penalty against the potential benefit of a lower rate.” “So that’s the disadvantage of early renewals,” she explained.

“You may go into an early renewal thinking that interest rates will continue to rise, but they do not, and you end up paying the penalty.” As a result, it’s a game of Russian roulette.”

You may want to consider a shorter mortgage term, which is typically three years or less, with the caveat that you don’t know whether interest rates will continue to rise or not, according to Campbell.

“Let’s say you choose a three-year term over a five-year term, and that three-year term comes up, and you suddenly have to pay even more because interest rates have risen in the last three years rather than waiting for five,” she explained.

According to the report, Samantha Brookes CEO of Mortgages of Canada has received a lot of calls in recent weeks from clients up for renewal soon and the top questions she asks them are: how much debt are they carrying, if they can renew now with the debt they are carrying and whether they can continue to carry the debt for the next couple of years.

“If you have the mortgage plus debts or a line of credit, or if you have a second mortgage and something is coming up for renewal and you can’t afford everything right now,” she said.

Laird of Ratehub.ca suggested considering a variable-rate mortgage at renewal if there is a chance of a recession in 2019.

“If a recession occurs, the central bank may be persuaded to stop raising rates and possibly lower rates.” So, the sooner and more severe the recession, the lower rates should be expected. “And only a variable rate mortgage would benefit from rates falling next year or the year after that, whereas a fixed-rate mortgage will stay at the rate you lock in at,” he said.