If your mortgage renewal is coming up in the next year, and you have been paying any attention at all to interest rates, you know that they are currently at a multi-year high. Until recently interest rates have not been above 5% since the 2008 financial crisis! But in late 2022, and now again, 5-year fixed rates are above 5%.
If you have a fixed interest rate, and if you are in a 5-year term, chances are that the mortgage rate you got in 2018 was close to 3%. With interest rates higher, renewing your mortgage requires a fresh approach. Here I will share some strategies to set you up for the best outcomes for variable-rate and fixed-rate borrowers.
Understanding the Unprecedented Rise
Over the past year, the mortgage market has experienced an unprecedented increase in overnight interest rates. The Bank of Canada’s target rate rose from 0.25% to 4.5% in less than a year. This sudden shift challenges conventional wisdom in the mortgage industry, making it crucial to adapt strategies for mortgage renewals.
Moving Away from the 5-Year Fixed
Traditionally, the 5-year mortgage term has been the default choice for most Canadian borrowers. However, recent months have seen a shift away from this standard option. Earlier in the year there were some great promotional rates for 3 and 4-year terms. In the current high-interest rate environment, many homeowners are increasingly open to considering shorter mortgage terms. Exploring the potential for a two- or three-year term may be worth investigating, considering the possibility of future rate drops.
Usually, a 2-year or 3-year term will have a higher interest rate than a 5-year term, but if rates go where we expect they will over the coming two or three years, then it may pay off to have some extra short-term pain for a better long-term outcome.
Evaluating Variable-Rate Mortgages
While some borrowers might speculate on rate drops, we currently advise against choosing variable-rate mortgages – at least until we start to see a downward trend. Besides that, variable rates are currently near or above 6%! Variable rates have risen to higher rates than fixed rates, even on short-term terms. Additionally, the penalties for breaking either type of mortgage term are relatively similar. We usually recommend a focus on securing the best short-term rate for clients rather than gambling on future variable rates.
Exploring Lender Options
Many Canadians are adapting to the current rate environment by transferring their mortgages to new lenders. This approach allows borrowers to explore better options outside of their existing lenders, particularly if they are insured or insurable. Transfers at renewal are becoming increasingly popular, providing clients the opportunity to secure lower rates compared to their current lender’s offerings. However, this won’t work for everyone since you need to re-qualify under the mortgage stress test when opting for a transfer.
Leveraging Existing Equity
In Alberta – especially in Calgary – many homeowners now have substantial equity and are utilizing their home equity to handle rate increases during the renewal process. Some borrowers are turning to products like TD FlexLine, Manulife One, or Scotia STEP to leverage their home equity. These products provide additional flexibility and are experiencing heightened demand in these areas. Some are extending their amortization back to 25 or 30 years for the time being, with the intention of shortening it later when rates drop. This allows for some payment relief until then.
The current interest rate climate presents both challenges and opportunities for mortgage borrowers. By staying informed and adopting new strategies, you can make informed decisions during the mortgage renewal process. We are here to guide you through these changes and help you secure the best possible outcomes for your financial goals.