Is your mortgage up for renewal? How to lessen the coming sticker shock

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Interest rate increases this year have been so steep that Canadians renewing their mortgages in the next six months could face larger payments, even if they’ve been hacking away at their principal for years.

For years, borrowers coming to the end of their mortgage term would face rates that were marginally higher at worst and considerably lower at best, said Ron Butler, mortgage broker at Butler Mortgage Inc.

Now, though, soaring interest rates mean many homeowners are contending with significantly higher borrowing costs at renewal, he added.

“I don’t think the public has seen this for a very, very long time,” Mr. Butler said.

For example, take the hypothetical case of a Toronto homeowner who bought an averaged-priced home in the city for $822,510 in July, 2017, with 20 per cent down. Back then, the borrower got a five-year fixed rate of 2.69 per cent amortized over 25 years, which translated into a monthly payment of $3,010.

Now suppose this borrower is renewing this month at what is, for today’s standards, a competitive rate of 4.59 per cent. This homeowner would face a new monthly payment for $3,551 – $541 more a month or $6,492 a year – according to calculations provided by financial products comparison site Ratehub.ca.

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In real life, many borrowers with impending renewals aren’t getting quite such a sticker shock, said James Laird, co-CEO of Ratehub Inc., which runs the Ratehub.ca site and has its own in-house mortgage brokerage.

That’s because borrowers can lock in fixed rates up to 120 days prior to renewal, Mr. Laid noted. This means many who are renewing now are doing so at the rates that were available in April.

David Larock, a mortgage agent with TMG The Mortgage Group, said the calls from concerned clients he’s fielding these days aren’t from borrowers who are renewing this summer, but from those whose terms end about six months from now. The common worry, he said, is that rates will be even higher by then.

Around 17 per cent of mortgages renew nationally every year, according to Mr. Butler, who said the number is the industry’s traditional estimate of annual churn. Of those, around 85 per cent have terms of five years, by far the most common mortgage agreement length in Canada. Another sizable chunk of renewals – roughly between 6 and 8 per cent – have terms of one year, with the rest made up of a mix of less popular contract lengths, he said.

Zainab Williams, a financial planner at Elleverity Wealth Management, is advising clients concerned about swelling mortgage payments to start rejigging their budget now. For example, for those who expect their monthly outlays to climb by $200 or $500, Ms. Williams suggests setting aside an equivalent amount in a high interest savings account.

Doing so right away – before the actual increase – will get you used to leaner spending, Ms. Williams said via e-mail. That will make it easier to transition to a bigger mortgage payment when your term is up, she argues. In addition, the savings you’ve amassed between now and your renewal date will be a welcome cash cushion that will also ease your financial stress, she said.

Another option for borrowers with tight cash flow is to stretch out their amortization, the time it takes to pay off the mortgage balance in full. Homeowners who’ve been chipping away at their principal may have the option to extend their mortgage finish line, opting for lower payments and slowing the pace at which they reduce their loan balance. (This route also means they’ll pay more in interest overall.)

But modifying the amortization requires renegotiating your loan agreement, something known as mortgage refinancing. If you’re borrowing from a lender subject to federal regulations you’ll have to undergo Ottawa’s mortgage stress test, Mr. Butler noted.

The same holds if you’d like to ditch your bank and sign up with a different lender that can offer a more competitive rate, he added. Some borrowers will find they can’t borrow enough under the federal stress test rules and “will be trapped to stay with their lender,” Mr. Butler said.

Still, those who can refinance may want to take advantage of the opportunity to shop around, Mr. Larock said.

The Toronto mortgage broker said he’s wary of the early mortgage renewal offers some of his clients are getting from their existing lenders. Such letters, typically mailed six months ahead of the end of the term, provide borrowers the opportunity to lock into a given fixed rate.

This may look like an especially attractive proposition to borrowers worried that interest rates will continue to go up. But early offer renewal rates are usually uncompetitive, Mr. Larock warned.

Borrowers may find a much better mortgage rate at a competing financial institution and still be able to freeze a rate up to four months before renewal, he noted.

Besides, he noted, an economic downturn might quickly bring interest rates down from recent record highs. Mounting concerns about a possible recession in the bond market are already putting downward pressure on fixed mortgage rates, he added.

“There’s a lot of air under the current fixed rates right now,” he said.

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