Others will soon when it comes time for their mortgage term renewal. How are people managing to afford higher payments? What can you do to reduce the payments? Well, let’s take a look.
Ways to Combat High Mortgage Payments
While it may seem impossible to keep up with rising interest rates, there are things that you, as a homeowner, can do to help alleviate some of the financial stress. Some of these have nothing to do with your monthly mortgage payments, while others will directly affect them.
Pay Down Non-Mortgage Debt
One way you can ensure that you have enough funds to make your mortgage payments is to make payoff or pay down loans and other non-mortgage debt. Things like a line of credit and credit cards will end up costing you much more money in the long run, especially if you have high credit balances and no fixed rate.
Making random lump-sum payments can also eat into a lot of your monthly budget. Paying those off and avoiding additional payments before you renew your mortgage will make a big difference in affording the extra few hundred dollars you may need to start paying each month.
Extend Your Amortization Period
While it’s not the most recommended option, extending your amortization period is one way that you can avoid higher mortgage payments. You might be wondering why this makes a difference. Well, the amortization period of a mortgage is the total time you have to pay it off. Say yours currently sits at 25 years. If you extend it to 30 years,, you have 5 more years to make your payments, ultimately reducing your monthly payments.
While extending your amortization period can reduce your monthly payments, it also has drawbacks. What are they, you ask? Well, the first is that you end up making more payments, even if they’re lower. And with those payments, we find the second problem, more interest payments. While it may not be noticeable, you do end up spending more money over time.
Consolidate Your Debt
Another way you can save money is to take out a loan and consolidate your debt. By doing this, you are putting everything into one fixed payment with one fixed interest rate, getting rid of your high-interest debts. This allows you to save money not only in interest payments, but also by reducing the length of time some of your debts would be outstanding.
There are two ways people choose to consolidate their debt. Some take out a consolidation loan that combines all of their non-mortgage debt. The second way is by consolidating it all into your mortgage. While this doesn’t necessarily reduce your mortgage payments at all, it does get rid of all of your other debt payments, making the mortgage payments more affordable and increasing your cash flow. Some people even choose to do this with their car loans.
Renew Your Mortgage Early
With today’s interest rates, you never know when the Bank of Canada is going to increase the overnight rate. Because of this, some homeowners are choosing to renew their mortgages early. If you renew too early,, you could end up paying a penalty, but in some cases, you may save more than the penalty.
That said, you can renew up to 120 days or 4 months before the end of your mortgage term. If prime rates are expected to rise again before your mortgage term ends, this may be an option to consider to secure the best mortgage interest rate. You can also talk to a mortgage broker, who will help you find the most competitive rate.
Get a Fixed Rate Mortgage
Those who have variable-rate mortgages are definitely feeling the rising interest rates. Even if your variable rate mortgage allows you to keep the same payments even when the interest rates rise substantially, you will notice that there is less money being put towards your principal.
In cases like this, it’s often recommended that you transition to a fixed-rate mortgage or lock in your rate. Your mortgage company will be able to let you know the specific options regarding your mortgage term and loan.
Improve Your Credit Score
When financial institutions calculate interest rates for your mortgage, your credit rating plays a big part in their decision. The higher your credit score, the more likely you are to pay less interest. Your mortgage loan agreement is renewed once your term ends, so you can avoid those painful,l higher interest rates by keeping your credit score as high as possible.
What if You Can’t Make Your Mortgage Payments?
While missing a lot of mortgage payments can result in a property foreclosure, having to miss one or two payments isn’t actually that big of a deal. Many people don’t know this, but in Canada, you can get deferred payment plans for your mortgage.
That said, many financial institutions allow only 1 or 2 payments per calendar year. There are no penalties for it, and it doesn’t hurt your credit score. In a pinch, this can really help.
What is the Mortgage Stress Test?
In Canada, the mortgage stress test is used to determine if you’re able to comfortably afford the mortgage. Federally regulated financial institutions determine this by using the rate of 5.25% or your actual mortgage rate plus 2%, whichever is higher. This isn’t just applied to new mortgages, though. It also applies to refinancing.
How a Trigger Rate Works
When it comes to mortgage rates, a trigger rate only occurs with fixed-payment variable mortgages. As interest rates rise, more of your payment will go to the interest portion, and less will go to the principal until the full payment amount only covers the interest. This is known as the trigger rate.
Once you hit the trigger rate, your payment is capped. However, if there’s still unpaid interest on top of your payment, then it’s added to your total mortgage. This is known as negative amortization, and it can increase your mortgage term length.
Once you hit this trigger point, the bank doesn’t like to leave any unpaid interest for too long, so you have a few different options.
- You can increase your monthly payments. If you choose to go this route, then you have to make sure it covers the full interest portion of your payment.
- You can make a lump sum payment. This decreases your principal balance to before the excess interest was added.
- You can get a fixed rate by converting to a fixed-rate mortgage. Depending on your prepayment privileges, there may be a refinancing penalty.
The Benefits of Choosing a Shorter Mortgage Term
When it comes to choosing a mortgage term, a mortgage calculator tool can help you to determine your new monthly payments. That said, with rising rates, many choose to go with a shorter mortgage term in order to take advantage of the lowest rates. It also allows you to take advantage of rates and get a mortgage renewal soon. The payment schedule of that mortgage is up to you. If you choose to do accelerated bi-weekly payments, then you can become mortgage-free faster.
Mortgage Refinancing and How it Helps
Mortgage refinancing refers to replacing your original mortgage with a new loan. So, essentially, you’re doing a full repayment on the original loan, which is why prepayment charges can apply depending on when you choose to refinance
If you got your first mortgage during high inflation, those mortgage rate increases could still be affecting you. By choosing to refinance early for a lower interest rate, you can see an immediate impact on your monthly payments. Even if your prepayment penalty is a significant amount, in the same term length, you could still meet your savings goals. You can even choose to make increased payments over a longer period of time in order to reduce your outstanding balance even faster.
Another reason to refinance your loan is to change your loan structure. An example of this is changing from a variable mortgage to a fixed-rate mortgage. You can also consolidate other loans into your mortgage, which can help combat previous increased interest rates and other steep increases in your regular payments. However, if you can do this close to your renewal date, you can avoid any penalties and take advantage of your prepayment options.
How Rate Holds Protect Borrowers
Rate holds in Canada are sometimes referred to as free insurance for Canadian borrowers and guarantee you a specific fixed interest rate for 90 to 120 days while you look for the home you want to purchase or while you wait for your mortgage to close. This protects you if the mortgage rates rise, but will still allow you to take advantage of lower interest rates. This allows you to take advantage of the best rates and is great for rate increase preparation.
Blend and Extend Mortgages Vs. A Full Refinance
If you’re looking to take advantage of lower mortgage rates, you have two different options. You can do a full refinance, or you can do a blend and extend mortgage. The blend and extend is a mortgage renewal strategy that combines your current mortgage rate with a lower current rate, which allows you to lock in a new mortgage rate early without having to pay a prepayment penalty. Here is how the two options differ.
| Blend and Extend | Refinance |
| There’s no prepayment penalty. | There may be a prepayment penalty depending on when you refinance. |
| Your rate is a weighted average of your old rate and new rate. | You can get the lowest qualifying rate that is available. |
| Not much home equity access so you may also need to go with a HELOC option. | You have access to both home equity and a principal reduction. |
| Your amortization schedule stays the same. | You can get longer or shorter ammortization. |
| It’s considered to be an early renewal with your existing lender. | It requires a new application, so your loan payments, credit card debt, the mortgage principal, your debt-to-income ratio, mortgage broker fees, and other financial obligations will impact your approval. |
How Lump Sum Prepayment Privileges Work
If you want to make lump-sum payments on your mortgage, it’s important to see if you have lump-sum payment privileges so you can put more money towards the principal without having to pay a penalty. Before you make any payments yo need to consider what is allowed.
Annual Percentage Limits: Lenders will limit how much of the principal you’re able to put down penalty-free every year. This is lender-specific, so it’s important to verify what your allowed amount is.
Open Vs. Closed Mortgages: The type of mortgage that you have will make a difference. Open mortgages allow you to put down however much you want whenever you choose. With a closed mortgage, you will have prepayment limits.
Renewal Date Privileges: Usually, 4 months before your renewal date, you’re able to take advantage of prepayment privileges before you fot get a new loan term.
Switching Lenders When You Renew Your Mortgage
To help you secure lower mortgage rates, especially in times when there are interest rate hikes, many Canadians will try to find the best rate possible, which could include lender switching and, in some cases, even porting a mortgage for a new home purchase. That said, your current lender is required to send you a renewal statement. You can use this to help negotiate with another lender.
Depending on the type of mortgage you choose, you can even get a discount off prime, find mortgage payment relief, or even find a second mortgage option. You don’t need a conventional mortgage to do this either; you just need to find a lender that will take your mortgage on.
Deciding Between Variable and Fixed Rate Mortgages
Whether you have mortgage default insurance or not, you need to consider a few things before you decide on the type of mortgage that you want. These include:
- The skip a payment option
- Closing costs
- Costs of an insured mortgage
- Any carrying costs that may be incurred
- Payment shock
- And if we’re in a rising rate environment
When choosing a mortgage, you want to decide which is best for your financial health. A household budget review and monthly budgeting tips can also help you determine what you can afford, overall.
The first thing you should consider is the interest rate forecast and the inflation effect. In order to control inflation, interest rates will rise until it falls back into the desired range. Bond yields impact interest rates as well, so we need to pay attention to those, as we’ve seen in the past year. This may mean that going with a variable-rate mortgage may not be your best bet.
If you’re looking for a predictable monthly payment, then a fixed-rate mortgage is going to be your best option. Your interest rate is locked in for the term, making it easier to pay down your mortgage principal. It can also help you avoid tapping into your emergency savings fund to help make your monthly payments if rates rise past the trigger point.
How Spring Financial Can Help
Did you know that, along with personal loans, we also offer mortgages, debt consolidation using your home equity, and line-of-credit and mortgage combos? It’s as easy as applying online and speaking to one of our licensed agents. They will be able to help you find the best mortgage solution for you.
