How to Prepare For a Mortgage Renewal in 2024
If you’re gearing up for your mortgage renewal in the upcoming months, prepare for some financial considerations. Make the process smoother by exploring different options and clearly understanding what’s available. Don’t let the renewal catch you off guard—be proactive and informed!
The pandemic brought rock-bottom mortgage rates, fueling a housing market frenzy that lasted nearly two years. However, the party ended with rising rates, leaving many homeowners with a financial hangover. For those on the brink of a mortgage renewal, the impact is imminent. Prepare for the changes ahead by understanding your options and navigating the evolving landscape of Canadian real estate.
Yet, dealing with challenges during a financial hangover can seem overwhelming. Despite homeowners’ concerns about managing increased variable mortgage expenses, Canada’s mortgage arrears rate stood at a mere 0.16% at the end of September. This reassuring statistic comes after a 475-basis-point rise in variable rates over the preceding 19 months.
Renewing your mortgage in 2024 might be a challenging experience, and it can undoubtedly squeeze your finances. However, grasping a few essential details about a mortgage renewal could pave the way for affordability and alleviate some of the financial stress.
Good news: Certain renewals may bypass the stress test
In a recent development on November 21, the federal government introduced the Canadian Mortgage Charter within its Fall Economic Statement. A notable suggestion in the charter proposes that homeowners with insured mortgages may no longer undergo stress testing when renewing with a different lender
Before this announcement, lenders were not incentivized to provide competitive rates during mortgage renewals. Borrowers faced a choice between sticking with their current lender’s offer or exploring a new one, but the mortgage stress test could tack on an additional 2% to their minimum qualifying rate.
Considering this risk, borrowers often stick with their initial lender and agree to the pricier renewal rates.
Now that the Canada Mortgage Charter is active eliminating the stress test for insured mortgage renewals is expected to introduce more competition to the market. This, in theory, should result in lower renewal rates across the board once lenders align with the new guidelines.
Consider teaming up with a mortgage broker to maximize the expanded options. They can assist you in accessing and comparing a more comprehensive array of mortgage offers.
Anticipate an Increase in Mortgage Renewal Rates
If your lender hasn’t sent you a renewal offer yet, you might be curious about how much higher your mortgage rates could go at renewal. It’s a challenging question to pinpoint precisely, but delving into a bit of data can offer some helpful context.
Based on data from Statistics Canada, the average fixed mortgage rate for insured mortgages with terms of five years or more stood at approximately 3.14% in 2019. Currently, as of this moment, certain mortgage brokers are presenting discounted fixed rates hovering around 5.3%. This implies that if you were to renew today, you could be looking at an increase of at least 2% on your mortgage.
On the flip side, major banks are inclined to determine your renewal rate using their posted mortgage rates, which tend to be on the higher side. As of November 29, the average posted rate for a five-year fixed-rate mortgage at Canada’s chartered banks was 7.04%.
Predicting where rates will stand in 2024 is a challenging task. Fixed mortgage rates hinge on the unpredictable activity of the bond market. Meanwhile, variable mortgage rates will only decrease if the Bank of Canada decides to lower its overnight rate.
Anticipate a downward trend in rates for the upcoming year. The easing of inflation and other indicators of economic steadiness should contribute to this shift. However, securing a rate substantially below 5% might prove to be a bit challenging.
Understand Your Options During Mortgage Renewal
Let’s explore three effective approaches to enhance your mortgage renewal deal.
Shop around
Renewing with your existing lender is often easier, but checking out offers from different lenders might lead to significant savings.
Changing lenders in 2024 might not subject you to another stress test, but you’ll still need to meet the qualifications for the new mortgage. To enhance your chances of securing a better rate, consider reducing debt and improving your household’s cash flow in the meantime. This proactive approach can make you more appealing to lenders.
Utilize your prepayment options.
A route to a more budget-friendly mortgage involves making a larger down payment and borrowing less. You can apply the same principle during renewal by settling as much of your mortgage as possible before entering negotiations for your next mortgage contract.
Several lenders in Canada permit you to make prepayments on your mortgage each year, either by boosting your monthly payment or through lump-sum payments. If this feature is included in your mortgage agreement and you have the funds, a prepayment or two could contribute to making your renewal more manageable.
Superb Mortgages Tip: Ensure you know your lender’s prepayment limits and the potential penalties for going beyond them. On a positive note, some lenders do permit you to make principal prepayments of any amount when it’s time for renewal. Checking these details is critical to navigating your mortgage terms effectively.
Re-amortize
Prolonging your amortization period during renewal can reduce monthly payments, making your mortgage more affordable—at least in the short term.
While re-amortizing might offer short-term relief, it comes with risks over time. This strategy could result in years of added interest charges and potentially affect your financial future. For instance, if re-amortizing extends your mortgage payoff to age 60 instead of 55, it might impact your retirement plans. Consider the long-term implications carefully before opting for this approach.
Consider a scenario where you have 15 years left on a $350,000 mortgage. Choosing a five-year fixed term with a renewal rate of 5.5% would result in a monthly payment of $2,848. However, extending your amortization to 20 years will reduce your monthly payment to $2,395.
While you’d pocket nearly $500 more each month, it comes at a cost—you’d end up paying $254,889 in interest by the time your loan is settled. In comparison, with a 15-year amortization, your total interest expense would be $162,693, saving you over $92,000 in the long run. Consider the trade-offs before making such a decision.
To sidestep hefty interest payments, you might consider temporarily extending your amortization for one term and reverting to its original length during the next renewal. While this could provide a few years of relief, remember that your payment will increase significantly when you shorten the amortization period. Essentially, you’d be postponing the payment shock you’re trying to evade.
Seek advice from a mortgage expert to determine the best renewal strategy for your situation. Knowing your options and their lasting effects on your financial well-being can help alleviate some of the challenges of a potentially tricky situation.