Making Sense of Rising Mortgage Payments: Renew or Refinance?

Many Canadian homeowners are facing a significant financial challenge as their mortgage payments start to rise. For many, the monthly payments they’ve been comfortable with for the past five years are suddenly doubling. The big question that’s on everyone’s mind: should you renew or refinance your home loan? Let’s break it down.

Renew or Refinance: What’s the Difference?

When a homeowner renews their existing mortgage at the end of its term, typically every five years, the lender updates the contract with a new interest rate. In most cases, this means higher monthly payments due to recent increases in the Bank of Canada’s key rate.

On the other hand, refinancing involves breaking the current mortgage contract and signing a fresh one. This option is beneficial for those looking to access home equity, consolidate debt, or find a better interest rate. Refinancing can also extend the amortization period, which spreads out the mortgage payments over more years.

Stretching Your Budget with Refinancing

For homeowners with tighter budgets, refinancing can offer relief by extending the repayment period, thus lowering monthly costs. It’s important to note that while this may reduce immediate financial strain, it can result in more total interest paid over the long term.

Research from the Bank of Canada reveals that nearly half of Canadian mortgages had amortizations longer than 25 years as of June 30, indicating a growing trend from 32 percent in 2020.

Surviving Soaring Rates

If your mortgage rates have skyrocketed to the point where your monthly payments barely cover the interest portion, or even fall short, consider making a lump-sum payment if you have some savings to spare. This can help you stay afloat during turbulent financial times.

Seek Professional Guidance

When seeking a better rate than what your lender offers, consult a mortgage broker. While renewal is the more common path, it’s crucial to ensure you’re offered a favorable rate. Your bank may not necessarily provide you with the best market rate, and negotiating may be best left to the experts. A lender is more likely to offer better terms if you have a competitive offer from another institution.

Points to Consider for Refinancing

If you decide to refinance, keep in mind that there are legal and appraisal fees involved. Additionally, if you refinance before the mortgage term ends, a penalty will apply. You’ll also need to pass the federal government’s mortgage stress test, proving you can still afford the loan if the interest rate increases by two percentage points.

Seeking a Better User Experience

Sometimes, refinancing isn’t just about money. It could be as simple as wanting a better user experience with your lender. If you’re having difficulty tracking your mortgage balance or accessing a home equity line of credit, you might opt to refinance.

Alternative Strategies

For those looking for alternative refinancing strategies, consider reaching out to family or close friends who are in a financially stable position. A private mortgage arrangement with someone you trust could be less burdensome and more flexible than a traditional lender.

Ultimately, the decision to renew or refinance your home loan depends on your unique financial situation. To make an informed choice, it’s crucial to consult with a professional financial planner who can assess your assets, debts, savings, income, and expenditure. They can help you navigate the best route to optimize your financial stability.

In a world where mortgage payments are on the rise, it’s essential to explore all your options and make the best choice for your financial well-being. Whether you decide to renew, refinance, or explore alternative strategies, careful consideration and professional advice are your best allies in making the right decision.

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