I attended a housewarming party this past weekend that was super fun. The Buyers of a condo did a complete renovation and invited the professionals they hired to help them along with some of their friends. We were invited as their realtors, along with the person who helped design the kitchen, the general contractor and even the person who sold them all of the beautiful appliances they installed.

I had a conversation with one of the attendees who was asking for some advice on a mortgage he was renewing. He was panicking a little as he was renewing a mortgage somewhere in the 2.5% range. Like many homeowners, he could afford the higher rates, however he was not happy that more of his disposable income would be going to a lender. His questions were about choosing a variable rate or fixed-term mortgage along with selecting a long or short-term. Also, should he stay with the same lender or move to another one? I have had this conversation more times than I can remember since the rates started to rise in the spring of 2022. (Crazy, we have experienced higher mortgage rates for 26 months now.)

I didn’t get into an in-depth conversation with the homeowner, but we did gloss over some of the main points of the mortgage market and how to make the best decision. Here are some points we covered in our brief conversation.

• Review your entire financial situation. Do you have a line of credit or credit cards with outstanding balances? Are you up to date on your revolving payments along with property taxes?
  This is important because the increase in rates has impacted not only mortgages but also lines of credit and credit cards. If you feel “stretched” financially it may be worth looking at some form of a consolidation. By increasing your mortgage, even with rates higher than they have been, you may be able to save by paying off debts with higher rates.
  
• Request a quote from your current lender to determine what they are offering if you renew with them. Ask for their rates on variable rate mortgages along with a 1,3 and 5-year fixed terms.
  
• Pay for a credit report for all owners of your property. This will show you your credit worthiness in the event you plan on moving to a different lender.
  
• Request a quote from several other lender to determine what is being offered if you were to move your mortgage.

This may seem a daunting task, however it can be easy if you work with a mortgage broker who can do most of the leg work for you. The main question is do you stay with your current lender or move. Rates are not the only reason a homeowner would renew with their lender or move to a new one. Moving lenders requires a homeowner to re-qualify using the stress test and in the event the homeowner is self-employed, there may be some hoops to jump through that are different that when they last applied for a mortgage.

When the rates started to rise in 2022, the variable rates seemed to be stable as the fixed term mortgages increased, however as the year unfolded, the variable rate mortgage jumped dramatically higher than fixed terms. Currently the variable rates are around 6.20% whereas a 5-year fixed rate is 5%. The question would be why would someone take a higher rate when they could get one that is lower. The answer comes down to risk vs pain.

If a homeowner chose to take a variable rate mortgage with the belief that rates were going to fall over the next year, they would end up in a better position. By taking the 5% fixed rate would mean you would be paying for 5 years at a high rate if the rates do drop. Comments coming from the Bank of Canada have indicated that as inflation has been falling the opportunity exists for the rates to reduce. Most economists feel that we will see rates start shifting downward in June or July.

If a homeowner is renewing a $500,000 mortgage as a variable rate mortgage they would have a payment of $3,260/month. and taking a fixed rate term would result in a payment of $2,900/month. The idea of paying $360 per month more hoping the rates fall is the gamble. In the event the rates drop to 4% the savings over the following 5 years would be in the range of $24,000. This is the upside of taking a variable rate mortgage and paying more at the beginning of the term.

Speaking with Kurt Henry from Durham Mortgage, one concern is that not all lenders will offer homeowners renewing mortgages the same rates they would offer new borrowers, so each homeowner may possibly be treated differently, making planning decisions challenging.

If you have a mortgage renewing this year, I would suggest reaching out to a mortgage broker and having them step you through the process of renewing or moving to a new lender. Since the Government implemented the stress test along with other changes to the way we borrow money, obtaining a mortgage or renewal has become a complex and confusing process. It is best to reach out to a trusted source for guidance.

If you have questions about a renewing mortgage, I can be reached at lindsay@buyselllove.ca or 905-743-5555 and Kurt Henry can be found at khenry@durhammortgage.com

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