In the last two years, the conventional mortgage lending rate for five-year term mortgages rose 77%.1 According to the Bank of Canada, the 1.4 million Canadians who got a mortgage in 2020 or 2021 could see their average monthly payment be 30% or higher within five years.2
If it's time to renew your mortgage, higher payments could impact your financial strategy. Here are five things you may want to consider to help control your payments.
1. Pay a lump sum
Renewing your mortgage may be the best time to make a lump sum payment. Putting down a lump sum at the time of renewal goes directly toward reducing the principal and typically can be done without incurring any penalties. If you don't have the cash on-hand, you may want to consider liquidating assets if it makes sense for you. Be aware, though, that this could mean selling assets at a less-than-optimal time. Talk to your financial advisor about your particular situation.
2. Change your payment frequency
When you change the frequency of your mortgage payments, you not only change how often you pay, but the amount you pay toward principal.
If you choose to pay more frequently, more of your payments go toward principal, meaning you'll pay less interest over the life of the mortgage, and you'll be able to pay it down faster. On the other hand, a less-frequent payment schedule means you make fewer payments per year, which could enable you to manage your cash flow more easily.
If you choose to pay less frequently, you could choose to make lump sum payments during the year if you find that you have extra cash. Be sure to read the terms of your mortgage before doing this, as many lenders have limits on how much extra you can pay per year.
3. Renew for a shorter term
According to the Canadian Mortgage and Housing Corporation (CMHC), more Canadians are choosing shorter-term fixed-rate mortgages.3 Shorter term rates typically come with higher interest rates, but the hope of many Canadians is that the Bank of Canada will choose to lower rates before their next renewal. If rates decline before your next renewal, this strategy may save you interest. However, there is no guarantee that rates offered at your next renewal will be low enough to offset the increase in interest you will pay now.
4. Extend your amortization
If you increase your amortization, you extend the amount of time you'll be paying down your mortgage, but you'll likely reduce your payments. This could enable you to have better control over your cashflow, but you'll likely spend longer paying down your mortgage.
5. Downsize or co-habitate
If you find that you're unable to afford your mortgage payments, selling and downsizing for a more affordable home could be an option to consider. Living with and splitting payments with a friend or family member could also enable you to better manage your payments.
What you do depends entirely on your unique situation. Before you renew your mortgage, you should research all of your options. Talk to your Edward Jones financial advisor about how the choices you make could impact your financial strategy.
1 Statistics Canada, Canada Mortgage and Housing Corporation, conventional mortgage lending rate, 5-year term
2 Bank of Canada, Financial system review
3 CMHC – Mortgage growth slows but debt remains at record highs