It really just depends on whether you have missed any mortgage payments, what your original mortgage interest rate was, whether your income has changed, and whether your credit score has gone down. Even if some of these factors have changed, it doesn’t mean that you won’t get approved.
What is Inflation?
Inflation may seem like a bad term, but in moderation, inflation can actually be a good thing. It can help the economy by stimulating economic growth. It usually stems from supply chains when demand exceeds supply. Because of this, prices ris,e causing a chain reaction that results in inflation.
That said, high inflation can have the opposite effect. With higher home prices in Canada’s housing market and reduced purchasing power, it’s much more difficult for Canadians not only to enter the housing market but also to continue to stay in it.
With the higher prices and higher interest rates, more and more Canadians are not able to afford house prices, and they are unable to afford daily necessities as those are continually rising too. If this continues for too long, a recession can happen.
A Recession and How the Bank of Canada is Trying to Prevent It
As inflation continues, the Canadian government has to take action to curb it, especially since it has been far above the recommended 1%-3% range. In January 2023, it reached 5.9%. Action had to be taken to lower it to the target rate of 2%. This is referred to as quantitative tightening.
When the Bank of Canada (Canada’s central bank) considers inflation and follows monetary policy, there is only so much it can do to combat rising inflation rates. In fact, they were the highest they have been in 25 years. The best way for them to combat inflation is to raise their overnight rates. When this happens, banks and credit unions have to do the same. That said, while it does work and has the desired effect, it can make some things more difficult in the short term. Things like financing, mortgages, and navigating unsecured debt can get tricky. In the short term, these things can end up costing you more money.
How it Affects Mortgage Renewals Directly
Prime rates are the base interest rates that banks use for all kinds of lending. With the rise in prime rates, all lending institutions’ rates will have to reflect that. Whether you already have a mortgage or not, it can still affect you.
There are two kinds of mortgage rates: fixed-rate mortgages and variable-rate mortgages. If your mortgage rate is fixed, then you probably won’t be affected until it’s time to renew. With a variable rate, the impact will be immediate. Either your monthly payments will increase, or more of your monthly payments will go towards the interest instead of the principal.
CHow a Mortgage Renewal is Affected by Inflation
How you are affected when it comes time to renew your mortgage term really just depends on a few different factors:
- Payment history
- Credit score
- Monthly income
- Debt-to-income ratio
If you have a good financial relationship with your current lender and haven’t missed any payments with them, they may just offer you a new mortgage. That said, the payments may be higher than you are used to due to the higher interest rates.
In some cases, they may not even run another credit check, especially if your monthly income hasn’t decreased since you bought your home or renewed your last mortgage. The lower rate you had before just may not be possible.
If you have missed mortgage payments in the past, it may be more difficult to get a mortgage renewal, especially with the same lender. This can be made more difficult if your credit score has dropped and you have less income coming in than before. There may be some additional requirements you have to meet in order to get approval.
Options for Getting a Mortgage Renewal
Even if you are unable to get approved for a renewal by the same lender, you still have plenty of options. Many Canadians choose to go through the big banks because they offer some of the most competitive rates. You could also get a mortgage broker to help you switch lenders. They will be able to help you find the best rate and payment options to fit your needs.
How to Lower Mortgage Payments at Renewal
When it comes to refinancing your mortgage, the Bank of Canada prime rate,, as well as whether your mortgage is open or closed, will influence your mortgage rate. That said, there are some things you can do to ensure you get the lowest rate.
- Get a Mortgage Broker: A broker can help you negotiate a better interest rate and find a lender that will offer you the best option based on the overnight lending rate.
- Get a Mortgage Loan Ammortization Extension: Even if you don’t switch lenders, extending your amortization period will lower your monthly payments to make them more affordable. This is a common strategy when homeowners refinance at renewal when the Bank of Canada rate has significantly increased.
- Make a Lump Sum Payment: Since you don’t have to worry about an early payment penalty or early renewal penalty, if you have some money saved up, you can put a down payment on it in order to reduce your monthly payments.
Fixed Vs Variable Rate at Renewal
When you’re renewing your mortgage, both of these rates could be a good option based on your situation. Let’s take a look at how they differ.
| Feature | Fixed Rate Renewal | Variable Rate Renewal |
| Rate | Stays the same for the entire term. | Fluctuates based on the Bank of Canada rate. Can do a rate lock-in. |
| Payment Amount | Stays the same for the entire term. | It cann change or stay the same based on the structure of your mortgage. |
| Prepayment Penalties | It can be high and is usually calculated using the Interest Rate Differential (IRD). | Usually just a 3-month interest penalty. |
No matter what type of mortgage you choose, you don’t want to have payment shock. A mortgage stress test will also help determine what you can afford during your mortgage term negotiation, and whether or not you’re considered to be a mortgage default risk.
When you’re first looking at a renewal, the rate hold period will be key. This is how long your rate will be held until the renewal is finalized. The bank will need time to assess your household debt, but in the meantime, you can still do some rate comparison shopping.
How the Bank of Canada Rate Affects Renewals
There are many ways the Bank of Canada rate can affect your mortgage renewal. Let’s take a look:
Variable Rate Mortgage: In Canada, variable rates change with the Bank of Canada rate and the consumer price index. Ifthey rate drops, then so does your variable rate, and vice versa. Depending on your mortgage, your amount will change with the rate, or just the division of your payments will change. However, there is a rate lock-in option to help mitigate variable-rate risk.
Fixed Rate Mortgage: These rates are also determined by the BOC rate, which is influenced by the housing market slowdown. The interest rate forecast will also help you determine the term you choose.
Payment Shock: When you renew your mortgage after 5 years, it’s pretty common to experience payment shock. Before you renew, though, economic recession indicators can help you determine what the rates will be, and a mortgage affordability calculator can help you determine the payment differences. If you got your mortgage during record low rates, you’re going to notice an increase when you renew.
Switching Lenders at Renewal Time
If you’re looking for budgeting tips and ways to mitigate a rate hike impact that’ll lead to a mortgage payment increase, one of the best tips is to shop around and switch lenders. During your renewal notice period, you can switch lenders with minimal lender switch fees and likely get a better rate than with your existing lender.
If you choose to switch from your current mortgage, a mortgage broker can get you many rates from different federally regulated lenders. This allows you to compare rates more easily during the mortgage renewal process while still finding a mortgage within your mortgage renewal timeline.
When it comes to the renewal process, you can start at early as 120 days before your renewal date. If you’re going to look at multiple lenders, starting early is key. You’re also going to have to submit documents so the lenders can review all of your factors,, including your debt-to-income ratios and employment verification.
Once you receive all of your offers, you’ll be able to compare the fixed mortgage rates to getting a variable mortgage, based on your financial situation. Paying attention to the rate forecast in Canada, the cost of living, cash flow, and the timing of an interest rate rise will help you decide between fixed and variable rates.
What is a Mortgage Stress Test?
Whenever you get a new mortgage or are switching mortgage lenders, a mortgage stress test is required. This will determine what you can comfortably afford and what the lender considers safe to lend you.
How to Negotiate a Better Renewal Rate
The key to getting a better rate on your mortgage is to start early. This allows you to collect written offers and negotiate to reduce monthly payments with written proof. Either your bank with your existing mortgage will be willing to negotiate with you, or a different lender will.
If someone from the front line isn’t willing to negotiate with you, then you may have to resort to going to management. Speaking with a retention specialist or a mortgage manager can yield better results with your mortgage agreement.
Locking in Early for a Renewal
With most lenders, you’re going to have no problem locking in your mortgage early. This is the same for a fixed mortgage or a variable mortgage. However, when dealing with a mortgage professional or a new lender, you can still make it so a mortgage renewal works for you.
Pros: One of the first benefits of locking in early is rate protection. If rates are predicted to rise before your maturity date, this can keep your payments low and even allow you to put extra down in order to pay your mortgage faster. To lower it even more, you can use your prepayment privileges and take advantage of prepayment options before there are any penalties.
Another option that is available to help you meet your financial goals is a blended mortgage option or a blend and extend mortgage. With this, you can blend your old rate with your new rate for a new blended rate and even choose to access home equity. With this option, you get predictable payments while still gaining access to extra funds to cover any major costs and expenses. If you’re purchasing a new home, you can choose to get a portable mortgage.
Cons: One thing to consider before accepting an early renewal offer is your financial position and if refinancing makes sense. By not waiting, you risk the rates going down and losing the ability to accept a lower offer. You should also speak to other lenders to see if they have a better offer.
With a closed mortgage, you could end up having to pay a penalty or additional fees for renewing before you receive your renewal notice. This is known as a prepayment penalty and can also be applied if you have a remaining balance and pay off your mortgage early.
What to do if You Can’t Afford Your New Mortgage Payment
With the extreme changes in the financial markets and bond yields, many Canadian homeowners are having a hard time covering housing costs, even though Canada’s policy rate isn’t extremely high right now. If you’re in this situation, the best thing you can do is contact your lender.
All lenders, including alternative lenders, can help you by amending your payment schedule, arranging a payment deferral, switching to interest-only payments, and extending your amortization period. You can also create a specific budgeting plan and consolidate debt in order to help ease the stress even more. If this doesn’t work, though, you may have to consider selling.
Can Spring Financial Help?
With today’s housing prices, the higher rates and the market conditions, getting pre-approval can be overwhelming. Did you know that we offer mortgages? Whether you are looking for a new purchase or need to renew your mortgage term, we can help you find the right lender.
Even with the rising mortgage rates, there are still plenty of options available to you. You can apply online,ine and one of our licensed agents will be able to help you.
