by Jennifer Kaila, Senior Financial Advisor, Island Savings, a division of First West Credit Union –
Your mortgage payment has always – more or less – fit into your budget. This time around, however, things seem to be different. Interest rates are much higher than a few years ago and you’ve likely crunched the numbers and found out that your monthly payments are going up.
Many B.C. homeowners have been in the exact same situation in recent months. In fact, monthly mortgage payments went up an average of $680 post-renewal in the fourth quarter of 2023, according to Equifax Canada.
It’s no wonder six out of 10 people are worried about their mortgage renewal. The idea of higher rates is understandably a source of financial stress, but you don’t necessarily have to accept a huge payment increase. Here are a few strategies worth exploring as you head into your mortgage renewal.
Extend Your Amortization Period
The average amortization period – or the length of time you plan to take to pay off your mortgage principal and interest – is 25 years. Generally, the longer your amortization, the lower your monthly payments, as you will be paying off your loan over a longer time.
If you’re looking to lower your mortgage payments in the short-term and you’ve been paying a mortgage with an amortization of 20 years, consider what lengthening your amortization might mean for your monthly payment. For example, a $500,000 mortgage with a 5.3% interest rate and a 20-year amortization would cost you $3,367.10 per month.
Changing the same mortgage to a 22-year amortization would give you a monthly payment of $3,195.24 instead, saving you just over $170 per month now, or $2,000 per year. On the plus side, that is a significant boost to your cash flow, but the downside is that you’ll be paying more money in interest over the duration of your mortgage.
Consider a Short-Term Fixed Rate
Another layer to consider in all of this is the possibility of falling interest rates – especially after Bank of Canada announced a rate decrease back in June. How much and how soon remains to be seen. Traditionally, homeowners have chosen a five-year fixed rate mortgage term at renewal. In a short-term mortgage, if rates do fall, you’ll have the flexibility to take advantage of a new, lower mortgage rate sooner without paying a penalty to break your mortgage. Of course, the trade-off is a higher interest rate.
My advice is to start planning early and always make sure you are connecting with an advisor to find the solution that works best for your lifestyle.
For more information, email jkaila@islandsavings.ca.
