Is your mortgage coming up for renewal?
Property owners are faced with renewing their mortgages typically every 5 years or less, depending on the mortgage term. During the mortgage term, there is a chance that the interest rates have changed, and as a result, the payment could change substantially. Some may get lucky and pay a lower amount than they had been previously paying, but for others, they may be faced with higher payments. Because of the upward trend of interest rates over the last few years, many that are up for renewal in the near future can expect much higher payments. There are however options to deal with those higher interest rates upon your renewal that can help keep the pressure off the monthly budget.
1. Address non-mortgage debt – Addressing non-mortgage debt before a mortgage renewal is important because it can have significant impact on your financial health. By tackling the debt prior to renewal, you will have an improved debt-to-income ratio which could lead to qualifying for better rates than you may receive with a high debt ratio. The biggest impact however is the reduced financial stress. Without having the pressure of debt payments on the budget, you have freed up cash flow, and now have the ability to handle higher monthly payments if you receive a higher interest rate than you previously had.
2. Extend remaining amortization – If you’re up for renewal and really feeling the financial pressure, there is an option to extend your remaining amortization if you qualify. For example, if you are renewing for the first time after 5 years, and have 20 years left until your mortgage is paid in full and there was $200,000 remaining at the time of your renewal, with an interest rate of 6%, your payment would be $1,424.38 monthly. If that increase from your previous payment adds too much financial strain, you could extend the amortization back to 25 years which could lower your payment down to $1,279.62 monthly. Although extending the amortization or life of your mortgage will reduce your on-going payment, it will add to the total interest expense over the life of your mortgage and therefore this option should be a last resort.
3. Downsize – If at the time of renewal, your housing needs have changed greatly, such as not needing all the space you currently have, downsizing might be an option that could help with the financial stress that increased interest rates bring. You could potentially end up with a smaller mortgage, lower property tax, cheaper insurance, and cheaper utility bills which could free up money in the budget for other priorities.
4. Rent spare rooms – If you have a spare bedroom, consider renting out the room. Adding a whole separate rental space would impact property taxes and insurance, whereas a spare room to rent would require no up-front cost/investment, be able to share the price of utilities, and have lower maintenance costs than if you were maintaining a whole separate rental space. The funds received for renting out the room could be used to handle any mortgage payment increase that you may be faced with.
5. Adult kids at home - Because of today’s economy, more and more adult children are choosing to stay living at home as long as they can, with the intention of saving money to put towards a down payment on a home instead of paying high rent prices. To ensure you and your children both benefit from the arrangement, consider a hybrid arrangement where your children are paying you “rent”, but you take a portion to put towards household bills, and take the other portion and set aside in a designated account to help go towards their financial goals of moving out/purchasing a home. This could be especially helpful when it comes time to renew the mortgage and you are faced with the possibility of higher monthly payments.
6. Drop “accelerated” portion of bi-weekly/weekly payments – If you start out with a mortgage amortized over 25 years and make monthly mortgage payments, it will take 25 years to pay off the mortgage. However, many people will opt to pay their mortgage more frequently, typically matching their payroll frequency. For example, if a monthly mortgage payment is $1,000 and the mortgage holder is paid biweekly, they could opt for accelerated biweekly mortgage payments of $500 ($1000/2). Depending on interest rate, paying more frequently, especially in months with an extra or third biweekly pay, the mortgage holder could shave as much as 4 years off the life of a 25-year mortgage. By dropping the accelerated portion of the payment, this same mortgage holder would pay $461.54 biweekly ($1000 x 12months/26 pay periods) and you are providing more flexibility to your monthly budget, allowing you to handle an increase in your mortgage payments if your payment increases at the time of renewal.
Before renewal time, take the time to assess your overall financial situation. Mortgage renewals are an opportunity to reassess your financial goals and make the changes that align with your personal situation. The above options might not be possible for every individual situation but by being proactive and informed, you will find options that best fit your needs.
If other non-mortgage debt is the main issue preventing you from being able to comfortably handle the increased interest rates, there are options. Filing a Bankruptcy or Consumer Proposal does not mean you will lose your home and in many cases could be the difference that allows you to handle higher mortgage payments upon renewal simply by freeing up a portion of cash-flow once allocated to dealing with non-mortgage debt.
If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options. Every financial situation is unique and viable options can differ from person to person. A conversation free of judgment is the first step to determine options for debt that make sense to you. For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.