It seems like only yesterday Canadians were enjoying historically low mortgage rates. In fact, according to Canadian Mortgage Professional, the lowest recorded fixed mortgage rate in Canada occurred recently between September and October of 2021 — a mere 1.44% for a five-year term. For more than a decade the mortgage market experienced an idyllic interest rate setting, allowing homebuyers and homeowners alike to seize opportunities and enjoy a sense of stability in the home.
Then came the global pandemic, a world event that upended financial markets, halted international trade, and forced us to rethink how we live and work. We’re no longer in a state of health emergency — thank goodness — but we are in a different world where low rates are no longer the norm. We’ve seen rate hikes happening at an unprecedented speed, and those who enjoyed ultra-low mortgage rates could be hit with sticker shock upon renewing their mortgage.
For variable-rate mortgage holders, the last 16 months have seen double-digit interest rate hikes. The Bank of Canada raised its policy rate 10 times from 0.25% in March 2022 to the current level of 5.00%, bringing higher variable mortgage rates, increased mortgage payments, not to mention plenty of worry and frustration.
At Vancity, we always strive to provide mortgage options that make home ownership more affordable and accessible. Feeling empowered about your finances can come during times of low interest rates, but you can also take control of your financial health by knowing how to navigate during uncertain market conditions.
Let’s look at the top five options to help manage your mortgage and reduce your borrowing costs.
Modify to Fixed Term
If you’re a variable-rate holder, and you’re worried about rates increasing again, it might be time to consider switching to a fixed rate mortgage. Converting to a fixed term locks in your interest rate and stabilizes your monthly payment for the length of your term, even if the market fluctuates. During uncertain market conditions, a fixed rate mortgage provides payment predictability. Knowing what your payment will be every month allows you to budget easier, plan ahead for the future, and most importantly, it can give you peace of mind.
Blend and Extend
The blend and extend mortgage feature is an often overlooked mortgage tool that can help save on interest charges. This tool is ideal for borrowers who want to leverage their current lower rates for longer. With a blend-and-extend mortgage, you’re taking your existing mortgage rate and combining it with today’s current rates. You’ll end up with a blended rate averaging between your old and new rate. Plus, you’ll be extending the length of your term for 5 years, so you get to enjoy this blended rate for the remainder of your new term. And since you’re keeping your existing mortgage and not breaking your mortgage contract, you won’t be subject to a prepayment penalty, which, in some instances, can be very costly.
The amortization period is the length of time it takes to pay off a mortgage balance in full. When you re-amortize, you are taking your current principal balance and refinancing to stretch the length of time it will take to pay off your loan. This reduces your monthly payments so you can manage your finances easier.
Re-amortizing your mortgage is one of the easiest — and most powerful ways — to reduce your monthly mortgage payment. Although extending your amortization will increase the time it will take you to pay off your mortgage in full, pairing a re-amortization with a lump sum payment (outlined below) can drastically help manage your mortgage payments and help save interest costs.
**30-year amortizations are available for conventional loans, only. Insured CMHC loans have a maximum amortization of 25 years.
Lump sum payment
If you happen to have rainy day funds set aside for emergencies or to cushion life’s curveballs, you can make an extra payment of up to 20% of your original principal mortgage amount every year. The entire lump sum payment goes directly towards your overall principal balance, so you’re paying down your mortgage faster and saving on interest costs all at the same time.
If making a large pre-payment towards your mortgage is not suited for you, you have the option to simply increase your monthly mortgage payment by 20% once a year. This option helps to pay off your loan faster, saving you time and reducing borrowing costs.
Keep in mind that any unused portion of your 20%/20% privileges cannot be accumulated or carried over, so if you have cash on hand, making a lump sum payment or increasing your payment could be a good way for you to offset the cost of rising interest rates.
Stick it out
This option is best suited for mortgage holders with limited time remaining on their term and the ability to keep up with fluctuating payments in the meantime. While it may be difficult to watch your payments jump, if you have the stomach to stick it out, it could end up being less costly over the long term, especially if there’s a penalty charge to break your mortgage. The decision to keep your mortgage as-is requires that we look at the broader economic forecast and what policymakers are doing to tame inflation, including raising rates or implementing restrictive lending guidelines.
It’s nearly impossible to predict with 100% accuracy which direction rates will go because there are so many factors that can impact mortgage rates. Nevertheless, in times of market uncertainty, Vancity is here to support you. Our dedicated team is committed to guiding you through these changing times and providing you with options that are best suited to your personal circumstances and financial goals. For personalized mortgage advice, book an appointment with a Vancity Mortgage Specialist here and let’s chat. We hope to hear from you.