Renewing Your Mortgage in a Higher-Rate Environment: What You Need to Know

If your mortgage renewal is coming up and you’re facing significantly higher interest rates than when you first secured your loan, you’re not alone. Many Canadian homeowners are encountering a more expensive borrowing environment, which can impact monthly payments and overall financial stability. However, with the right strategy, you can minimize the impact of rising rates and make informed decisions for your financial future.

Why Are Mortgage Rates Higher?

Over the past few years, the Bank of Canada has increased its benchmark interest rates to combat inflation, and the 5-year Government of Canada bond yield has increased. As a result, lenders have raised their fixed rates, and variable mortgage rates have increased as the prime rate increased, leading to higher costs for borrowers. While rates may fluctuate, the trend has been towards more expensive borrowing compared to the historically low rates seen in previous years.

What to Expect When Renewing Your Mortgage

When your mortgage term ends, your lender will typically offer a renewal agreement. However, it’s important not to accept the first offer without evaluating your options. In a higher-rate environment, careful planning and negotiation are essential to securing the best terms.

Here are a few key factors to consider:

1. Assess Your Current Financial Situation

Before committing to a new mortgage term, take stock of your finances. Consider:

• How much your monthly payments will increase at a higher rate
• Whether you have any additional debt that needs to be managed
• Your long-term financial goals and budget

2. Shop Around for the Best Rate

Many homeowners simply renew with their existing lender, but this can be costly. It’s wise to explore offers from different lenders, including banks, credit unions, and mortgage brokers. A mortgage broker can help you access competitive rates and special promotions that may not be widely advertised.

3. Consider a Shorter Term

If you believe interest rates might decrease in the next few years, you may want to opt for a shorter-term mortgage (e.g., a 1- to 3-year term) instead of locking into a 5-year fixed rate. This gives you the flexibility to renew at a potentially lower rate in the near future.

4. Explore Fixed vs. Variable Rates

• Fixed-rate mortgages provide stability, ensuring your payments remain consistent throughout your term. This is a good choice if you want certainty in your budgeting.
• Variable-rate mortgages can be riskier but may offer lower initial rates. Historically, variable rates have been advantageous over the long term, but this depends on market conditions.

5. Increase Your Payments (If Possible)

If you can afford it, increasing your mortgage payments or making lump-sum payments can help reduce your principal faster, ultimately saving you interest costs over time.

6. Consider Refinancing or Extending Your Amortization

If higher rates are causing financial strain, refinancing might be an option. This could involve extending your amortization period to lower your monthly payments or consolidating high-interest debt into your mortgage. However, this means paying more interest in the long run, so weigh the pros and cons carefully.

Final Thoughts

Renewing your mortgage in a higher-rate environment can be challenging, but with careful planning and expert guidance, you can navigate this transition effectively. Avoid rushing into a renewal without exploring your options, negotiating with lenders, and considering alternative strategies that align with your financial goals.

If you’re looking for tailored advice on your mortgage renewal, contact me so I can assist you in securing the best terms and reducing the impact of rising rates.