Mortgage Payments Increasing: What Should You Do?

Facing higher monthly payments due to mortgage payments increasing? Canadian homeowners must decide between renewal or refinancing of their home loan. Find out what you should do.

Many Canadian homeowners are facing a financial challenge as their mortgage comes up for renewal. With the recent increases to the Bank of Canada's key rate, they are experiencing higher monthly payments. This leaves them with a crucial decision to make: whether to renew or refinance their home loan.

Mortgage Payments Increasing: What Should You Do? | ogusyis

Renewing an existing mortgage involves updating the contract with a new interest rate at the end of its term, which is typically five years. However, most mortgage-holders will see an increase in their monthly payments due to the higher interest rate. On the other hand, refinancing allows homeowners to break their current contract and sign a fresh one. This option can be beneficial for those looking to access their home equity, consolidate debt, or switch lenders for a better rate. Furthermore, refinancing also offers the opportunity to extend the amortization period, which is the time required to fully pay off the mortgage.

For homeowners facing financial constraints, refinancing provides relief by re-amortizing the mortgage over a longer period of time. Although this may result in paying more total interest in the long run, it lowers the monthly costs since the payments are spread over several additional years. The Bank of Canada's research reveals that nearly half of Canadian mortgages had amortizations longer than 25 years as of June 30, a significant increase compared to 32 percent in the summer of 2020.

In cases where mortgage rates have escalated to the point where monthly payments barely cover the interest portion, some homeowners may consider making a lump-sum payment if they have spare cash on hand. Many individuals have been resorting to liquidating their savings and allocating the funds towards their mortgage.

Homeowners seeking a better rate than what their current lender offers can turn to mortgage brokers for assistance. While renewal is the more common route, it is advisable as long as a favorable rate is provided. However, it is important to note that your bank may not offer you the best rate available in the market. In such situations, bargaining is better handled by professionals. Realistically, the lender will only consider matching another offer if it comes from someone else.

For those opting to refinance, it is crucial to consider additional costs such as legal and appraisal fees. Moreover, refinancing before the mortgage term ends may incur a penalty. Additionally, borrowers need to keep in mind that refinancing also requires passing the federal government's mortgage stress test. This test ensures that borrowers can still afford the loan if the interest rate were to increase by two percentage points.

In conclusion, Canadian homeowners facing mortgage renewals must carefully evaluate their financial circumstances and weigh the decision of renewing or refinancing. Considerations such as the increase in monthly payments, accessing home equity, and the option to switch lenders or extend the amortization period play vital roles in this process. While each option has its pros and cons, seeking professional advice and exploring different lenders' offerings can help homeowners make an informed decision.