With rising interest rates and newfound stress testing rules, mortgage refinancing has become that much more expensive and complicated. As a result, if you want to avoid unexpected expenses and headaches along the way, it is important to start early and do your research when renewing your mortgage.
Kelly Wilson is a mortgage broker who is also the co-proprietor of the Wilson Team brokerage firm in Ottawa. According to Wilson, the vast majority of Canadians stick to the same lender as far as mortgage renewals are concerned. However, this may prove unwise in some cases as taking the time to explore your options may pay great dividends in the long term. In fact, saving anywhere from 30 to 50 basis points can save Canadians several thousand dollars over a five-year term.
According to CIBC, 47% of existing mortgages will need to be refinanced in 2018: This is in stark comparison to the general 25 to 35% range, which, according to CIBC, is the range for a common year. In addition, the spike in refinance rates is attributed to regulatory changes that have been made in recent years. The mortgage renewal increase has come at a time where mortgage rates have begun to steadily escalate.
How The Big Banks Have Responded
The majority of Canada’s big banks have responded by slowly increasing their mortgage rates over the last few weeks. However, when compared to the summer of 2017, special offer rates have also increased. Moreover, the rate for five year fixed mortgages has risen over 3% in the last few weeks, whereas numbers were trending just south of 2.5% in 2017, according to Ratehub.ca; a website that specializes in analyzing rate figures.
Owners that renew their mortgages at a higher rate than what they’re currently paying will likely have to deal with increased mortgage payments, assuming that the amortization period remains constant. Moreover, homeowners who chose to not insure their mortgages, and who stretched their budgets to the limit in order to purchase their home, will face additional problems, if they decide to renew their mortgage. Interestingly, 2018 marked the inception of new rules, whereby owners who are interested in changing their lender before they renew their mortgage may have to undergo a new stress test.
As a result, those who fail the stress test will not be able to switch banks to renew their mortgage. The end result is those borrowers will be hard pressed to obtain any negotiating clout with their current lender, leaving them in a bind.
Home Equity Line of Credit
Borrowers interested in switching lenders may also have to pay additional fees if they have a home equity line of credit, regardless of whether or not they have an outstanding balance on their line. In other words, certain borrowers may be able to save on the rate but will be unable to move their mortgage because of the additional fees.
Do Your Homework Early
Grant Rasmussen is the senior vice-president of mobile advice at CIBC and suggests that homeowners start doing their research up to 6 months before their actual mortgage renewal date. Take the time to go over your finances with your financial advisor, assessing your monthly and annual income — as well as expenses — and how they have changed since you originally got your mortgage. You should also take the time to speak to your lender directly to better assess the situation.
It is important to crunch the numbers in order to determine the best course of action for you and your family. Starting early can also allow you to lock in a solid rate, which may end up saving you money if rates continue to steadily increase over the year.
Fixed rate or variable rate?
Deciding whether to go with a fixed rate mortgage or a variable rate mortgage may also affect how much you end up spending. For instance, fixed rate mortgages tend to have rate offers that are higher than variable rate mortgages. However, the influential overnight rate target was recently increased by the Bank of Canada. They’ve increased it three times since last summer, and their current path seems to indicate even higher rates in the future. This will impact variable rate mortgages.
The final decision will be determined by whether you value risk over peace of mind or vice versa. Regardless of your final decision, it always helps to start early in your planning. Take the time to plan out a map so you can make a confident decision, instead of feeling pressed for time and feeling pressure to make a decision that can cost you thousands of dollars over the years.
Assess Your Mortgage Needs
There are certain questions that you can ask yourself in order to better determine which mortgage plan is right for you. For instance, do you have sufficient funds in your budget in order to increase your mortgage payments? If so, you can increase your payments so that you can pay off your mortgage sooner and become a homeowner quicker, and also save thousands in interest charges over the years.
You may also want to decide whether to pay your mortgage payments in monthly or bi-weekly payments. For instance, if you opt for the accelerated bi-weekly route you will be able to pay off your mortgage even quicker.
Finally, if you have other debts that have higher interest rates then you may want to consolidate them in order to augment the amount of your mortgage loan.
In sum, we hope that you start early and do your research when renewing your mortgage in order to save both money and time in the long term.
For more more information about renewing your mortgage, call Northwood Mortgage™ on +1 (888) 495-4825 or contact us here.