Understanding Your Mortgage Options In Today’s Climate

Do you have a mortgage renewal coming up? Are you looking to move? Or renovate? Any of these situations – or managing any household debt – might be causing you concern in light of recent interest rates.

There are reasons for optimism, though. For one, the Bank of Canada recently lowered rates, with some predictions of more to come. And there are plenty of proven ways to get ahead of payments. Let’s explore some, with a focus on mortgages – and starting with arguably the most important one of all.

Don’t lose sleep over your renewal – speak to an advisor

Whenever a big change looms in life, it’s the unknown that tends to worry us the most. Once we clear up the mystery, we’re in a better position to act.

So it is with mortgages. If you’re facing a renewal – and the prospect of higher payments – you’re far from alone: some 2.2 million Canadian mortgages are scheduled to renew in 2024 and 2025.

The first step: “Demystify” your future payments by speaking with an expert advisor. They can run simulations of what your payments would be at current rates (or slightly lower to account for any future rate cuts) and compare them with your current payments.

Armed with this information, you can act, including finding ways to increase your income or adjust (or create) your household budget. You may also be able to lower your payments by extending your amortization, but bear in mind that would mean paying more interest over time. An advisor can help you find the right approach.

Pay down the mortgage or invest – the script has flipped

Taking a “holistic” approach to your mortgage – that is, looking at it as part of your overall portfolio instead of in isolation – can also lead to new ways to lower your payments, or pay down your mortgage faster.

For example, do you have money in a Tax-Free Savings Account (TFSA)? Back in the low-rate 2010s, it would’ve made sense to focus more on investing than paying down debt.

Today, the situation is different. If your mortgage rate could rise to, say, 5% at renewal and your TFSA is earning around 4%, you could lock in an instant return by using your TFSA funds to pay down your mortgage.

What’s more, you’d only lose the TFSA contribution room from your withdrawal for a few months, as it’s added back at the start of the next calendar year.

Follow these tips to get the best mortgage rate

Even a few basis points off your rate can make a big difference in your payment. To ensure you get the best rate possible, do the following:

•  Keep all debt payments current: Lenders favour borrowers with strong credit, so making sure you stay up to date on payments is key. Any payment more than 30 days late counts against your credit score, but your current lender will be aware of payments that were late by less than that.
   
• Plan ahead and ask for advice: Whether you’re starting a new mortgage or renewing an existing one, finding your best rate can take time, patience and research. Each mortgage-seeker’s situation is unique. For example, the more you’ve paid down your mortgage, the more negotiating power you may have. Seek expert advice for the information and strategies that best suit your needs.
   
• Insured mortgage options: If you have an applicable insured mortgage – like those through the CMHC (Canada Mortgage and Housing Corporation) – you should also be able to switch lenders at renewal without undergoing the federal government’s mortgage stress test. That’s according to a stipulation of stipulation of the government’s recently released Canadian Mortgage Charter – a set of recommendations to the financial industry.
   
• “Lock in” your rate: All lenders can guarantee a rate 120 days ahead of maturity, so take advantage of this to protect yourself from increases. Also, when speaking with a lender, make sure they’ll pass on any savings should rates decrease during the locked-in period.

Fixed or variable – or both?

Many people see the choice between a fixed- and variable-rate mortgage as one-or-the-other. But there’s room for some creativity here.

For example, a “hybrid mortgage” lets you go “fixed” for a portion of your mortgage (providing some payment certainty) and variable for the rest (allowing for the possibility of savings, which variable rates have historically offered over fixed rates).

Another possibility? “Blend and extend,” an option some lenders (including BlueShore Financial) offer that lets you average currently available rates with the rate your fixed-rate mortgage carries now and use that as the basis for an extension. This could offset some of your payment increase at renewal.

Using credit for your renovation plans

If your home needs renovating, it’s a good idea to apply for credit as soon as possible, even if you don’t need it right away. That’s because the loan would be approved based on your financial situation today, so you’d have the funds available in the future, even if your financial conditions change.

As for options, consider a home-equity line of credit (HELOC), which lets you borrow against your home (up to a certain limit). You’re only required to pay interest on these loans, and their rates would move lower as the Bank of Canada reduces its policy rate.

Steps to take when considering an “in-law suite”

A growing trend in housing today is the shift toward multigenerational properties – where, say, elderly parents will sell their home and buy a larger one, with an in-law suite, in conjunction with their kids.

It’s a great way to pool resources and save on housing costs, but before doing so, it’s important to have a detailed conversation among family members and set the conditions you agree to in writing.

What types of issues need to be discussed? Things like what will happen if one party wants to sell, for example, or how you’d split the cost of an expensive repair. You’ll also want to agree on how you’ll divide routine costs like the mortgage, property taxes and utility costs. To get even more basic, it’s important to stipulate the physical part of the home where each party will live.

Another thing to plan for? What might happen in the case of an unforeseen event, such as a marriage breakdown, or what happens to an owner’s share should they wish to sell. You’ll also want to speak with a lawyer or notary to ensure the property title is drawn up to properly reflect your joint-ownership agreement.

Smart mortgage management begins with advice

The best way to take control of your mortgage and get greater peace of mind is to sit down with a trusted advisor and run some scenarios so you know exactly where you stand. Then you can explore options for increasing your income, reducing costs or by getting a bit more creative, perhaps by considering a hybrid mortgage or moving to a multigenerational setup.

We know sorting through mortgage options and strategies can be complicated, frustrating or even overwhelming. If you have any questions about mortgages and home ownership, we’re here to help. Visit a branch or make an appointment to speak to an expert today.