How Rate Fluctuations Impact Mortgage Renewals in Canada

From the time a new homeowner signs their initial mortgage to the time they are considering renewing or refinancing their mortgage, the rates have inevitably changed. The fluctuations, whether up or down, will impact the final mortgage payments, so these rates are an important factor to take into consideration. They often become the focal point of many conversations and considerations every few years when the renewal period comes up. Understanding the mortgage renewal process and the impact of fluctuating rates will help homeowners with making better decisions for their financial future.

The Fundamentals of Mortgage Renewals

A mortgage renewal marks the end of the mortgage term and creates an opportunity to negotiate potential new agreements with either the existing lender or a new one. Homeowners can choose to repay their remaining mortgage in its entirety or choose a lender for a new term. The rate at the time of this negotiation carries a lot of weight for the homeowner, impacting their monthly payments, interest costs and overall total expenditure for the mortgage moving forward. This is where the fluctuations between the initial mortgage, or previous mortgage term, and the future mortgage term come into play.

Rate Fluctuations in Mortgage Renewals

Factors like the Bank of Canada’s policy interest rate, inflation rates and the current economic climate, in both Canada and the world, can impact the mortgage rates. Typically, the changes are in small increments over time but when things like inflation are taken into consideration, mortgage rates can change quickly and occasionally, more drastically than what is considered normal. In these cases, homeowners can be hit quite hard at renewal time by vastly different mortgage payments than they previously had. Decreased mortgage rates can be a pleasant surprise come renewal time, but increased rates will raise mortgage payments and may impact more than just the housing costs for some homeowners. 

The Total Costs of a Mortgage

Over time, rate fluctuations can impact the total cost of a mortgage, either negatively or positively. When a home is purchased for a certain price, that mortgage is based on the rates at that time, the cost of the home and the term of the mortgage (total number of months or years for the current contract with the current lender, often 3-5 years) as well as amortization (total number of years estimated to pay off the mortgage balance, typically between 20 and 30). When rates increase, even a small percentage over the full amortization period of the mortgage, this can lead to tens of thousands of extra dollars spent in just interest alone. 

The Element of Timing

The timing of a mortgage renewal can make a huge difference in the overall costs of the mortgage as well. When the mortgage renewal is approaching, it is beneficial to have a plan in place and speak with experts in the industry to learn the best timing for renewals. Mortgage brokers have industry knowledge and connections, making them a great resource for discussing mortgage renewals. In addition, they may have access to different rates and favourable mortgage options that can help balance out small increases in the rates. In some cases, it may be best to break a mortgage early and pay the penalties to secure a better rate if there are changes to the rates that can drastically impact the homeowner’s payments. 

When to Talk to a Mortgage Broker

Setting up an appointment to speak with a mortgage broker is generally recommended about 4-6 months before the renewal deadline. This allows time to assess the current market, mortgage rates, trends in the market and create a strategy that has the best benefits for the homeowners. It also provides the option of securing a rate-hold from lenders that can help secure a better rate during times that the rates are increasing. However, if the rates go down during this period, the rate-holds can be updated to reflect the better rate offered. This provides a win-win situation for the homeowners looking at renewing but only applies when they’ve secured the approval ahead of their renewal. 

A mortgage renewal is an important financial decision. Consulting with a professional early allows homeowners to make more informed choices about their options and potentially save thousands of dollars in interest payments over the course of their mortgage. With mortgage rates constantly fluctuating, seeking professional advice, making informed decisions and taking proactive steps ahead of time can help save money and time at each renewal period.