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Nov 1, 2023

Renewing Your Mortgage When Rates Are High: Panic or Plan?

by Russ Morrison

It's hard to believe that since March 2022, the Bank of Canada (BOC) has increased the overnight rate ten times, resulting in a total increase of 4.75%. This overnight rate directly affects the prime rate (now 7.20%), which is the rate that we, as Canadian consumers, pay on our mortgages (variable-rate mortgages only), lines of credit, and any other lending products that use the prime rate to determine its lending rate.

These rate increases have put a significant strain on Canadians' day-to-day spending, which is what these rate increases are meant to do. Increased interest rates = less consumer spending = lower inflation rate. At this point in time, the series of rate hikes have had an impact mainly on “variable rate” mortgage holders, which is the mortgage product many Canadians chose when the overnight rate was near 0% in 2020 & 2021. In 2020 and the first half of 2021, the inflation rate was within or below the target range for the Bank of Canada, with the expectation that rates were going to be low for a long period of time. Fast forward to 2022, and Canada's inflation rate peaked at 8.1%.

Along with higher rates comes the challenge of qualifying for a mortgage because the rate used to satisfy Office of the Superintendent of Financial Institutions (OSFI's) Guideline B-20 Residential Mortgage Underwriting as of September 2023 is anywhere between 7.50-9% depending on the term and product that a borrower desires, while previously it was 5.25%. This guideline tests whether a borrower could manage a higher mortgage payment due to higher mortgage interest rates. This helps mitigate the risks that borrowers may face from future increases in mortgage rates, decreases in income, or unexpected increases in other expenses.

However, there are many Canadians who opted to choose a fixed-rate mortgage and have been protected against the series of rate hikes because their payments and rates have not changed. Many of these borrowers secured rates anywhere between 2.50% - 4% during 2019-2021, but with these mortgages typically being a “5-Year Term”, these mortgage holders are starting to wipe that sweat from their foreheads and wonder if they will be the BOC's next victims of higher rates!

Panic Or Plan?

If you have a mortgage coming up for renewal, you will, at some point, experience higher rates, which can and will make many borrowers worried and anxious about what is to come for them. This will ultimately result in the challenge of servicing higher payments and a higher overall cost of living. On the other hand, most often, there is a way to get around an obstacle or challenge because we all know there is more than one road we can follow.

There are many lenders in Canada for a reason, who offer many different types of products to serve the unique needs of borrowers that are all meant to satisfy a need for them and, most importantly, a solution. Many borrowers assume all mortgages are the same, but they are definitely not. Options are plenty in Canada, but you do need to find an experienced mortgage professional to help in completing a “Needs Analysis” so the best choice can be made for a borrower's next mortgage term instead of just signing on the dotted line.

What is A Needs Analysis?

A “Needs Analysis” is a series of simple questions meant to find problems and challenges for mortgage-holders and then find a solution for them (i.e., solve problems that borrowers never knew they had). This is similar to the Know Your Client (KYC) that financial advisors complete with their clients. A KYC is a due diligence process financial companies use to verify client identity and assess and monitor client risk and is meant to give financial advisors a clear understanding of how to manage their clients' assets and determine the best path for them. A needs analysis is meant to help mortgage professionals understand the needs and challenges their clients have so they have a clear understanding of how they can manage their clients' liabilities and determine the best path for them.

Here is an example of a mortgage needs analysis that can be used to help borrowers strategize for their next term when their mortgage reaches its maturity/renewal date (i.e. its term end), along with how these questions can help borrowers save time and/or money during their next term.

What Is The Estimated Market Value Of Your Home?

Knowing the value of a home can determine whether there is enough equity to refinance your mortgage if needed. When a mortgage comes up for renewal, no penalty will apply, so this is a time when making changes can be done with very little cost.

When Did You Purchase Your Home, And What Was The Purchase Price?

Some mortgage lenders have categories of pricing that can source rates, in some cases, 50% (or more) lower than competing offers. This type of mortgage pricing is referred to as “insured” or “insurable”. To qualify for this type of mortgage pricing, the value of a home when it was purchased, along with certain qualifying rules, must be met.

How Would You Rate Your Current Mortgage Lender?

Has your lender reached out to you to check in on you? To see if you have any questions? Have they completed a need analysis like the one we are looking at now? Have they contacted you if there is an opportunity to save money and lower your rate? Has their customer service been good or great? If you're not happy with your current lender, then now is a time to consider alternatives.

Do You Have Plans To Renovate In The Next Few Years?

If this is either a maybe or a yes, then you may need access to home equity, so you have the money to complete these renovations. If you do not already have a home equity line of credit (HELOC), then this should be considered, as you will be able to have access to money simply and quickly. If you do not add a HELOC now and decide to add it in a year or two, then it is likely going to be more expensive, and you may even need to change lenders (if your current lender does not have a HELOC product).

Do You Have Any Non-Registered Investments?

If you have non-registered investments, then the income earned from these investments is taxable. A registered investment already receives tax benefits from Canada Revenue Agency (CRA) (such as Registered Retirement Savings Plans (RRSP) & Tax-Free Savings Plans (TFSA). With non-registered investments, a strategy called “debt swap” could be used to lower the taxes that are paid on the income earned from these investments.

In a simple debt swap strategy, you draw your non-registered investments and use the funds from the sale to pay off (or down) your mortgage (the non-deductible debt). In turn, you re-borrow the same amount using your mortgage (secured by your home) and use the proceeds to purchase a non-registered portfolio of income-producing assets, which then creates a tax-deductible mortgage.

Do You Have Any Liabilities Other Than Your Mortgage?

If you have liabilities other than your mortgage, such as credit cards, unsecured loans, unsecured lines of credit, and auto loans with high payments, consolidating this higher-interest debt should be considered so the overall cost of interest decreases along with monthly payments.

Can You Manage Your Current Mortgage Payments?

Avoid “payment shock” or at least decrease it upon your mortgage renewal. The main fear Canadians have in this high-rate environment is payment shock when their mortgage reaches its maturity date. Payment shock is the sudden increase in payments due to higher interest rates. A way to simply combat this is to re-amortize their mortgage payments. Today's mortgages (if a homeowner has at least 20% equity in their home) allow borrowers to increase their amortization up to 30 years, which will result in lower mortgage payments.

During your next term, do you plan or are you considering any of the following:

Buying a rental property, vacation property, or second home? Help kids with school, college, or university? Planning to move?

If any of these endeavours are being considered, restructuring your mortgage to add a HELOC should be considered if the use of home equity will be needed. A HELOC will allow for easy access to funds to help with these costs. If you are planning to move, a HELOC can be used to source the deposit if you plan to purchase another home. Also, if you are planning to move, then considering a product that has the flexibility to exit without paying high penalties is something to consider since fixed-rate mortgage products carry a much higher exit penalty than variable-rate mortgages do.

An obstacle that has come up for my clients is the ability to qualify for a new mortgage when their mortgage matures since the stress test rate is so high. However, borrowers have the option to just sign on the dotted line with their mortgage lender when they receive their renewal offer with no need to re-qualify (at this point in time, that is). The only time you will need to re-qualify for a mortgage is if there are any material amendments to that mortgage, such as a change of covenant, increasing the mortgage (refinance), or re-amortizing it.

Taking everything into consideration upon the maturity date of a mortgage, borrowers do have options to either panic or plan. With the many options that are available to Canadian mortgage holders, a solution is almost always possible if the borrower is willing to accept the terms, either short-term or long-term.

Never forget that you have options! Thoughts of renewing your mortgage should not be keeping you up at night!

Russ Morrison MBI, is a Senior Mortgage Broker based in the Vancouver/Fraser Valley area, who has been actively working in the mortgage industry since 1999. He prides himself on being able to help homeowners with more than just finding a low rate, but also educating and showing them how to best utilize the numerous options available in today’s mortgage industry.