3 ways to make your mortgage more affordable at renewal

For those approaching their mortgage renewals, the current interest rate environment is much different than it was five years ago. Those with variable rates have already seen their interest rate rise, while those with fixed rates will be in for a shock. Renewing your mortgage term after the Bank of Canada’s series of eight policy interest rate hikes is not an ideal situation to step in to if you’re used to your fixed rate. And if you have a variable rate that has climbed significantly, you may have already adjusted your finances to meet your payments. 

In either case, you’ll want to do all you can to make your mortgage payments more affordable when you renew this year. A mortgage broker can help guide you through your renewal, but the following three methods are a good starting point.  

1. Stretch your amortization period

If you find that you can only afford to pay the interest on your mortgage at your current rate, it may be time to adjust your amortization. Extending the number of years you have to pay down your mortgage allows you to pay off your loan at a slower pace. 

“This is a good option to make payments more affordable until rates come back down,” says Ray Silvestri, mortgage agent at Axiom Mortgage Solutions. 

Fortunately, stretching your amortization isn’t permanent. You can always shorten it down the line if you can afford larger monthly payments in the future. In this case, lenders typically allow you to increase your payments from 10% to 20%, says Silvestri. “You can also put 10% to 20% of the mortgage amount down as a lump sum ever year.” Doing so can help you save on interest once you’re able to pay off your mortgage quicker. 

2. Compare mortgage rates

One of the best ways to ensure the most affordable mortgage is to compare mortgage rates from Canadian lenders at renewal. For example, if your current lender sends you a notice prior to renewal with a new, ugly interest rate, you don’t have to accept it. In addition to negotiating a better rate, you can shop the market to find a lender that may offer you the same mortgage conditions at a lower rate.  

Skipping this step and automatically renewing with your original lender at the time of renewal could mean passing up an opportunity to get a more affordable mortgage without having to pay any prepayment penalties.  

3. Renew your mortgage with a fair penalty lender

When renewing a mortgage, many borrowers pay little mind to the penalties outlined in their contract. But the type of penalty you would face if you break your mortgage early can determine how affordable your mortgage really is.  

While most variable-rate mortgages have a simple penalty for breaking the contract (three months’ worth of interest), fixed-rate mortgages can be subject to the interest rate differential — the difference between the remaining interest you have left on your term at your contract rate and the current posted rate for a similar mortgage term. Your lender will charge you the higher of the two options. 

A fair penalty lender will ensure that your prepayment penalty proportionately compensates your lender for ending your agreement prematurely — rather than over charging you with inflated rates.  

Those who will offer “the lowest penalty to break a fixed mortgage are monoline lenders,” says Silvestri. Monoline lenders only offer loans, unlike other lenders that also offer credit cards or bank accounts. “The difference is they will calculate the penalty based on the rate you were given, not the posted rates that the banks use, which are much higher.” 

Finding a lender with an interest rate you’re comfortable with is just as important as finding a penalty you can afford.  

Shopping around for a mortgage that is suitable to your current budget and includes the conditions you’re looking for is key to getting a more affordable mortgage at renewal.