Tag Archives: mortgage renewal

With Your Mortgage: Now Do The Opposite

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Since 80% of homeowners have a five-year fixed mortgage, millions of people have a mortgage renewal to deal with this years.

With rates at their highest point since the 1980s and likely a couple more rate hikes coming early this year, that’s a nightmare about to hit them. If you’re one of them, as I was last year, don’t just shrug your shoulders and sign up for another five-year term before doing some thinking and research. Yes, spend a few days thinking this through – just make sure you never do anything because you read me suggest it – or the suggestion from anyone else without doing your own due diligence!

Remember last year when gas prices were at insane levels? Our brains are wired to think that that’ll be the case forever. Remember looking at any of your investment statements in the last year? You’d have been better off to never open the envelopes. But, if you did, it was down, down, down and your brain thought it’ll be down forever and (hopefully not) to just get out and put the money under your mattress.

Today, gas prices are back down and in 2023 and next year, your investments will also come back. What stays down (or up) doesn’t stay there forever. So don’t get depressed or in that “what’s the use” mindset and just sign another five-year mortgage term.

My thinking, and what I did, might be a good starting point for you to consider another mortgage term this time around: As we discussed in a story last year, I was able to do an early renewal. Yes, it was a two percent higher rate, but avoided the last three (and coming two plus) rate increases.

Variable rate: That’s only a good deal when rates are at their max and heading down. That way, each month, your mortgage rate will be reduced with decreases in the prime rate. But that’s not today.

One year term: That made no sense to me to have to renew again when rates will have barely peaked. I wanted/needed a little more time for rates to finish rising, stabilize for some time, and start to come down.

Two year term: That would be 2025. Maybe that would have made sense, but when the rate fever breaks, it’ll take a bit for the inflation to ease – meaning a period of stable rates before a rate drop happens to again re-boost the economy. Two years didn’t seen long enough for me to be able to be on the sidelines.

Three year term: That, to my way of thinking was the perfect timeframe for all that to happen and already be pretty much assured rates will be down. Down all the way? No idea? Still rising? No chance the Bank of Canada will not have inflation beaten down and the economy back on track. In my view and action, three years made the most sense right now.

That doesn’t mean I’m not still massively jealous of a neighbour with a 1.8% rate for four more years…but I can’t live for a better past. I can just deal with the reality of today…

Ready For The Recession?

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Happy New Year! But likely not so happy in the financial world for the next six months or so as it’ll be unlikely that we’ll avoid a recession this year.

While rate increases happened pretty much all of 2022, the impact isn’t usually felt in a big way by consumers for at least six months. And that time is upon us. Actually, it was upon us in November or so, but there isn’t anyone who’s going to turn off their spending tap right before Christmas. There also aren’t many companies who want to be seen as Scrooge in doing big layoffs in December.

January, however, is very different and we’ll see an immediate decrease in consumer spending and a large increase in layoffs. Once person’s spending is another person’s (or companies) income. That creates a spiral effect boosted by inflation and high interest rates that’ll accelerate a slowdown rather quickly.

While 80% of Canadians holding a mortgage have a 5-year term, this year another one-fifth of those are up for renewal. Add that to the one-fifth who renewed at much higher rates last year and 40% of them are now facing the reality of $400 or more in mortgage interest. National Bank estimates that the median amount spent on mortgage costs is 67% of income. The normal ratio anyone uses is around 30% tops and this is an even worse situation than the early 19080s. That doesn’t leave a lot of money for non-essential spending for those who are laid off, had their hours cut back, are in the 40% who’ve had to renew their mortgage or the 20% who had a variable rate mortgage all along. That group of being hit with huge mortgage renewal rates will keep going until 2027. That’s the big advantage the U.S. has where everyone has a 15 or 30-year fixed mortgage…

Oh, and rental rates keep rising as landlords pass on their higher carrying costs, utilities, etc. so you can add most renters to the large group of people who are now barely able to cover their basic living expenses.

That’s assuming we’re not using credit cards to keep up our lifestyle. Since the end of summer, credit card pay rates (the percentage of balances paid each month) has been dropping significantly while auto loan arrears are growing.

So happy New Year is more likely to be an un-happy new year of 2023…

Close To Your Mortgage Renewal? Make a Call To Save $10,000 Or More

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There’s another (likely “only”) half a percent rate increase coming at the next Bank of Canada meeting in September. While inflation seems to have peaked, but that’s just an educated guess, our rate increases may not be over until the end of the year.

If you have a mortgage coming due for renewal like I do, it’s not a pleasant thought. However, if your mortgage comes up in the next six months, a number of lenders WILL let you renew if you’re within that six months! That’s what I did last week. My rate is going up 2.4 percent, but that’s better than three percent after the September increase, and any other jump after that. Check with your lender today if your mortgage is up in February next year or earlier! That call may end up saving you over ten thousand dollars!

What’s the rate increase going to cost you? That depends on the rate you currently have. However, a 3% increase on each $100,000 will be $3,000 a year. So someone with a $400,000 mortgage will see their payments go up close to $1,000 a month! What do you get for that? Nothing! It’s a huge increase in your monthly spending for just getting to stay in your home. Yes, it stinks and it’s depressing, but that’s what rising rates cause. Your early renewal will start the following month, so be ready to change your payment budget!

How long should you renew for? That’s up to you. I only ever answer questions as to what I would do – or in this case, what I did. My thinking was that rates will peak sometime next year at the latest. But then it’ll take a while for them to ease downward. Like gas prices, they spike up and take forever to come back down. Even when the Bank of Canada decreases rates, that doesn’t mean the chartered banks will immediately pass that prime rate decrease on. So it didn’t make sense to me to just do a two-year mortgage for that reason. But I sure wasn’t going to sign for five years at these rates as selling or refinancing triggers a big penalty (typically three months or the interest differential – whichever is larger.)

So I picked the kind-of middle option of a three-year term at 5.2%.

While my mortgage is pretty small, I sympathize with anyone who is close to the $400,000 mortgage example about to flush $36,000 of net income down the toilet over the next three years…

Close To Your Mortgage Renewal? Make a Call To Save $10,000 Or More

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There’s another (likely “only”) half a percent rate increase coming at the next Bank of Canada meeting on September 7th. While inflation seems to have peaked, but that’s just an educated guess, our rate increases may not be over until the end of the year. (Their next meeting date to likely raise rates again will be Oct.ber 26th.)

If you have a mortgage due for renewal like I do, it’s not a pleasant thought. However, if your mortgage comes up in the next six months, a number of lenders WILL let you renew if you’re within that six months! That’s what I did last week. My rate is going up 2.4 percent, but that’s better than three percent after the September increase, and any other jump after that. Check with your lender today if your mortgage is up in February next year or earlier! That call may end up saving you over ten thousand dollars!

What’s the rate increase going to cost you? That depends on the rate you currently have. However, a 3% increase on each $100,000 will be $3,000 a year. So someone with a $400,000 mortgage will see their payments go up close to $1,000 a month! What do you get for that? Nothing! It’s a huge increase in your monthly spending for just getting to stay in your home. Yes, it stinks and it’s depressing, but that’s what rising rates cause.

How long should you renew for? That’s up to you. I only ever answer questions as to what I would do – or in this case, what I did. My thinking was that rates will peak sometime next year at the latest. But then it’ll take a while for them to ease downward. Like gas prices, they spike up and take forever to come back down. Even when the Bank of Canada decreases rates, that doesn’t mean the chartered banks will immediately pass that prime rate decrease on. So it didn’t make sense to me to just do a two-year mortgage for that reason. But I sure wasn’t going to sign for five years at these rates as selling or refinancing triggers a big penalty (typically three months or the interest differential – whichever is larger.)

So I picked the kind-of middle option of a three-year term at 5.2%.

While my mortgage is pretty small, I sympathize with anyone who is close to the $400,000 mortgage example about to flush $36,000 of net income down the toilet over the next three years…

Mortgage Renewal Alert!

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At one point or another, all of our $1.5 trillion in mortgage loans comes up for renewal. 75% of people do not shop around at renewal. THAT is insane! A back of the envelope calculation, assuming everybody has a five year term and saves (easily) half a percent is that we leave $1.5 billion a year on the table by not comparison shopping!

Last month I had an email from a gentleman from Kelowna with a great heads up for anyone with a mortgage. His mortgage comes up for renewal in March and his bank was offering to renew him early and was going to give him some reward type points as a bonus.

No – stop! The points might have a value of $50 bucks or so. That’s not enough to give up your freedom and lock yourself in this early. They did this in order to avoid him shopping around, and in case there’s another quarter point rate decrease.

Yes, rates will go up, but not between now and March, or even the spring. 60-days out is when you should start shopping around as you’ll be a free agent! Decide on a few things in advance between now and your renewal:

Do you think rates will go up in the next few years?

Will you still live in your home for another three to five years? If it’s yes to both, you want a longer term fixed rate mortgage!

Can you pay some money onto the principal before you renew? If so, your quotes will be for a lower amount.

Do you have at least 20% equity so you don’t have to pay the rip-off CMHC mortgage insurance? That’s your home value versus your mortgage balance.

Go to any online mortgage calculator and play with some payments. You know your balance, now try some ideas: Shorten the time by a year and you’ll see your payment goes up very little. It’s about $27 for a $200,000 mortgage. THAT you could afford. Try accelerated by weekly payments. That’ll cut four years or more from your time and a huge amount of interest. Just use the posted rates that you see less half to three-quarter percent and you’ll be close. Two of the better calculators are at CMHC and Royal Bank, among others.

Then, get three quotes in writing: One from a credit union, one from your existing lender, and one other.

The average person that books travel online visits over eight sites before they book. Yet 75% of people just sign the renewal of their mortgage. Don’t be one of them! Saving $100 on travel versus $10,000 or more on your renewal makes no sense!!

There is an exception to this shopping around: If your credit has turned bad, or your other payments have jumped a lot – you won’t be in a position to move your mortgage. You don’t even want your current lender to re-run your credit report or to re-work your debt ratio that can’t exceed 44%. Sign a short term renewal, then get on with fixing your credit issues and paying down your other debt before the next renewal.

A $19,000 Mortgage Mistake

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As the sub title of the It’s Your Money book says: tools, tips and trick to borrow smarter. Today, I have a huge insight into the tip for you, and the trick of the banks to share with you.

On a $250,000 home purchase, a good rule of thumb is that you may be able to negotiate a discount on the sale of around three to five percent. At five percent, that’s a saving of $12,500. A great deal, but nothing compared to the savings, or wasted money, that can happen with your mortgage.

Last week, a listener e mailed me, and he was rather choked, to put it mildly. Last year, he signed a five year variable rate mortgage with his bank, with an option to convert to a fixed rate at any time. Seems like a good idea on the surface, doesn’t it? He had the benefit of the low interest rate, but when it started to move up, he had the chance to lock in a fixed rate for the rest of the four years left.

Well, it seemed like a good idea at the time. I’m very proud of this listener, because, before he went back to his bank to convert this variable rate mortgage to a fixed one, he got two other quotes. Very smart. So he knew that he could get a 3.9% five-year fixed rate in the market.

Yes, this listener also knew he was locked into the other four years with his bank. His shopping around wasn’t to move his mortgage, because the penalties would eat him alive. It was to be ready to negotiate the fixed rate on the last four years left!

But, and it’s a big but: He didn’t read the fine print when he signed the five year mortgage. Yes, he could convert at any time to a fixed rate, but it was at the POSTED rates! Let me put that another way: There is no negotiating when you choose to switch the variable rate to a fixed one. It will be at full sticker price. And like car purchases, who pays sticker? Well, he did!

The difference between the negotiated rate in the market and what the posted rate was with his lender is now costing him $19,000 in extra interest for the next four years! The banks will offer a very attractive variable rate on a five-year mortgage, with the option to convert to a fixed rate. But the catch, and it’s an expensive catch, is that the conversion will be at the full posted rates. A discount now in return for huge additional profits later.

$19,000 is a staggering amount of extra interest that was totally unnecessary if the listener had asked the question and read the documents he signed with the renewal. If your mortgage is up for renewal, you need to get at least three quotes and ask a lot of “what if” question. If you’re buying a home, you’ll need to spend more attention to your mortgage options and choices than negotiating on the purchase price. After all, you buy the home once, but have to pay interest for decades!