Mortgage Extensions: Survive an Interest Rate Shock

What to expect if you need to renew your mortgage in 2023? Compare your options and prepare properly before meeting with your banker.

Rising interest rates are tormenting many owners. Those who have benefited from mortgage rates as low as 3% or even 2% now face rates that easily exceed 5% on loan extensions.

And it’s not over yet. The Central Bank of Canada raised its key rate again in December, for the eighth time since March. A scenario that could last until 2023.

How to soften the shock? “It depends on your profile, your situation and your financial goals,” sums up Charles-Olivier Ledoux, financial planner at IG Wealth Management.

If the increase in your monthly payments keeps you up at night, you can use an extension to extend the loan repayment term, for example by spreading the balance repayment over a new period of 25 or 30 years. As monthly payments are spread over a longer period, they will decrease. However, this solution comes at a cost, as it involves paying more interest.

Extend now or wait?

You can also renegotiate your mortgage right away to take advantage of the lower rate. Banks generally allow extensions up to six months prior to the due date without penalty. Before this period, charges may apply. The question is whether the game is worth the candle. The penalty must be lower than the interest savings for the operation to be interesting.

If you’re not being taken by the throat, you can also increase or speed up your payments to reduce your rollover balance or even make a lump sum payment. Depending on your agreement, financial institutions allow you to pay 10 to 20% of the loan amount without penalty.

“Mortgage extensions require preparation,” says Charles-Olivier Ledoux. He offers to take the opportunity to clear his balance. For example, combining other debts into one payment to get a lower interest rate. Thus, the money saved can be reused to pay off the mortgage.

This exercise is helpful for homeowners who are concerned that they are not eligible to renew their loan. Indeed, from June 1, 2021, they must claim the mortgage interest rate agreed with the bank plus 2% or 5.25% (whichever is higher). For example, for a loan at 6%, you must be able to bear 8%. This “stress test” applies if you want to refinance your home, change lenders, or use a home equity line of credit.

So, fixed or variable rate?

According to Charles-Olivier Ledoux, this is the million dollar question. He believes the variable rate is still attractive despite the hike if one is willing to take on some risk in the short term, as growth could slow or even stall during the last two quarters of 2023, according to several analysts. .

If caution makes you lean towards a fixed rate loan, the adviser suggests choosing the shortest term. “Most likely, in a few months, rates will fall, so we avoid being caught and paying a huge penalty for a mortgage loan failure in the middle of the term. »

Hold cash

Finally, “prioritizing mortgage payments isn’t always the magic solution to staying afloat,” asks the financial planner. It is still recommended to keep cash to build an emergency fund or contribute to the RRSP to minimize taxes.

“It’s all about balance,” concludes Charles-Olivier Ledoux. And also patience. Instead of being rushed, it is better to weigh the pros and cons, remain vigilant and wait for the situation to develop before making long-term financial decisions.

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