Worried about a higher mortgage rate? Tips to ease stress when renewing

It’s wise to start working on your mortgage renewal 4 to 6 months in advance, Lucreziano says, so you have time to work out your finances and compare options with the support of your advisor.

“You want to have a clear picture of your cash flow based on the options available to see the impact on your household expenditures as a whole,” she explains. If you’re facing higher mortgage payments due to higher interest rates, “You’re going to want to look for ways to cut back on discretionary expenses, to see if you can make up some of that difference.”

An advisor can help you determine what mortgage term might work for you and the difference in rates, such as a two-year versus a five-year mortgage. CIBC has a number of mortgage calculators that can help you compare different rates, terms and payment options.

It’s also important to assess what’s happening with rates in Canada before making any decisions.

“We’re currently in a declining rate environment with recent rate cuts from the Bank of Canada,” Lucreziano says. It’s expected interest rates will gradually come down further, she adds, so committing to a shorter-term mortgage may make sense, as rates could be lower in a year or two, enabling you to refinance later at those lower rates.

Another factor to consider is whether to choose a fixed or variable rate mortgage. Many Canadian homeowners prefer a stable, fixed rate for their mortgage payment due to its predictability, Lucreziano says. However, with rates edging lower, a short-term variable rate mortgage — in which the rate rises or declines depending on Bank of Canada interest rate moves — may better suit your financial goals and give you the option to lock in when rates are lower.

“Currently, fixed mortgages have lower rates, but if the Bank of Canada continues to lower rates, variable rate mortgages may be more attractive.”

To help you pay off your mortgage faster, you can also consider a lump sum payment when renewing your mortgage or moving to biweekly payments instead of monthly, she says. With biweekly payments, you’ll end up making one extra payment each year, plus aligning payments with your paydays can help you stay on track, budget-wise.

One common question that comes up around mortgage renewals is whether to aggressively pay down your debt or invest instead. To evaluate that option, look at the rate of return on your investments, Lucreziano says.

For example, if you have a mortgage at 6% interest and the investments in your TFSA (tax-free savings account) earn only 3 to 5%, you could choose to take some funds from your TFSA to pay down the mortgage.

“It’s really about comparing the interest rate you’re paying on the debt and the interest rate that you’re earning on your investments.”

To mitigate any payment increases that will be coming upon renewal, another strategy would be to makes changes now to prepare for that future shock, Lucreziano says.

For example, a client with a variable rate paying over 6% could use the CIBC mortgage calculator to estimate what their payments will be and use that to increase their payments today accordingly. Alternatively, a client paying a fixed rate at 1 to 2% could take the difference between their current payment and their expected future payment and contribute that to a high interest savings account on a bi-weekly or monthly basis.

That way, when the client is up for renewal, they’ll have these funds available to make a lump sum payment and reduce the payment shock.

Another benefit of this strategy is that it allows clients to adjust their budget now when they still have time on their side, ensuring they’re better financially positioned at renewal.

With so many complex options available, Lucreziano reiterates that it’s best to seek out advice to help you make the right decisions to achieve your unique short- and long-term financial goals.

“You want to have a plan. The plan doesn’t have to be perfect, it can be worked on and revised over time. That’s the important piece of having an advisor, like a financial coach; they’re there with you for the journey.”

To learn more about mortgage renewal strategies, connect with an advisor today.

Originally published in The Globe and Mail, September 2024.