Last week, I wrote about the challenges of having a variable rate mortgage when mortgage rates are increasing. This week, I’d like to discuss how fixed rate mortgages (FRM) offer a measure of safety. Depending on when your FRM is up for renewal, you have some breathing room to figure out how to handle the increased mortgage payments that are coming your way.
The generational low mortgages, i.e. rates below 3%, are pretty much gone for good. For very brief blip of time, you could get a discounted 5-year rate for 1.39% in 2021! That’s an incredibly low mortgage rate for a 5-year term, one I doubt that I will see again in my lifetime.
Even if you were able to snag a 5-year rate lower than 3% in early 2022, I can pretty much guarantee that you’ll be paying atleast 2% more when you renew in 2027. For my money, I think you should take the following steps to prepare yourself.
Gather information
First of all, start playing around with mortgage calculators. Plug in your own numbers so you can see the difference that a higher rate is going to have on your mortgage payment. It should be obvious that a higher rate on your FRM means that the payment is going to go up. The mortgage calculator’s job is to inform you of the size of that increase.
Armed with that knowledge, you can start making a plan on how to pay for your property when your mortgage costs go up. The last thing you want is to be surprised by a $500 increase in your mortgage payment, or to face a future foreclosure because you can’t pay your mortgage debt.
Build a lumpsum payment
Secondly, start saving the difference between what you’re currently paying on your FRM and what you anticipate paying at renewal. How you save the money is up to you. Here are a few suggestions:
- Get a part-time job.
- Bring in a roommate.
- Cut your expenses.
- Obtain a promotion or raise at work.
- Start a cash-flowing side-hustle.
- Use an insurance payout or inheritance.
- Sell things you no longer use.
- Take transit to save on parking fees.
- Cook at home most days of the week.
- Save your tax refunds and work bonuses.
Open a separate bank account for this money. Set up an automatic transfer so the money goes into the new mortgage account without any further decision-making on your part. Remove the temptation to spend this money – do not get a bank card for this account! If it’s your priority to be in a position to handle your increased mortgage payments, then you should not be touching whatever’s in this account.
This money is meant to be in place so that you can make a lumpsum payment against your mortgage at renewal time. Lumpsum payments decrease the amount of money being borrowed. Applying a lumpsum to your outstanding mortgage balance will lessen the impact of the higher interest rate’s impact on your mortgage payment. The more of the principal that you pay down, the less money you have to borrow from the bank to pay off your remaining mortgage debt.
Increase your mortgage payments
Thirdly, you can increase your mortgage payment. When I had a mortgage, my bank allowed me to increase my mortgage payment by up to 20% every year. It was a fantastic feature, and I used it religiously. Of course, my initial mortgage payment was something like $300 bi-weekly, so it wasn’t a hardship to find an extra $60 every two weeks. A friend of mine took a different path. Every two weeks, she determined whether to make a lump sum payment against her mortgage. Since her expenses were far more variable than mine, she needed that flexibility. However, the both of us managed to pay off our mortgages way earlier than the 25 years that our lenders had allotted to us.
Your mortgage payment might be over $1500-$2000-$2500, so a 20% increase will pinch a bit harder. However, if you can increase it by any percentage, then do so. The sooner you repay the principal balance owing, the lower the balance that you have to renew. A lower renewal balance results in less of an increase in your future mortgage payments.
Renew now instead of later
Finally, determine if you can lock in a mortgage renewal rate today. This step is for people whose FRMs are coming up for renewal in the next 90-days. Most lenders allow people to renew their mortgages early, usually within 90-120 days from the expiry of the mortgage term.
While it’s not a 100% guarantee, you can confidently assume that the Bank of Canada will be raising the prime interest rate again on October 26, 2022 then again on December 7, 2022. When they do, lenders will take the opportunity to increase their mortgage rates. If you lock in a renewal rate before these dates, you should definitely do so.
A Measure of Safety
I’ve always relied on fixed rate mortgages. I think they’re great for allowing borrowers to know the fixed costs of their shelter for a defined period of time. Having a fixed mortgage payment goes a very long way towards understanding where your hard-earned money must be allocated. My father once told me that, when you know the cost of your shelter, you can build the rest of your budget around it. He was right. Having a place to lay your head is a fundamental necessity so paying for it must always be top of mind.
Assuming that you do not want to sell your property or lose it to foreclosure, it would behoove you to start thinking about how much your mortgage payment is going to be upon renewal. Knowledge is power so use knowledge to your advantage. In this post, I’ve shared a few tips with you on that steps you can take to minimize the impact of increase rates that are headed our way. You will need shelter until the day you die, so please do not procrastinate. Take steps today to ensure that you can shelter yourself tomorrow.