1. Drawing up a financial balance sheet
The arrival of a child, a new car loan, a career shift... your situation may have changed since you first took out or renewed your mortgage, and major changes usually have an impact on your finances. Now’s the time to draw up a balance sheet and review your budget.
Consider future plans
When you take out a mortgage, you make a commitment for a period that can vary from a few months to several years. This is known as a “mortgage term.” This means that on top of analyzing changes that have occurred since you last signed, it’s also important to anticipate future developments. Certain projects, such as renovations or the sale of your property, could influence your choice of term. We’ll come back to this later.
Good to know: have you considered a line of credit for home renovations or the purchase of a second property?
A portion of the principal you pay towards your mortgage gives you access to a secured line of credit known as a home equity line of credit. It’s based on the value of your property, and financing is available immediately.
→ Check out our article on home equity lines of credit to learn more.
Drawing up a balance sheet and evaluating your future projects should give you a better picture of your personal finances and help you reassess your mortgage needs.
And if there’s room in your budget, you may want to consider increasing your payments to pay off your mortgage faster and save on interest.
On the other hand, if you’re struggling to make your current mortgage payments, contact your advisor for some personalized advice.
Good to know: have you thought about mortgage insurance?
Mortgage loan insurance protects you against financial downturns by covering your mortgage payments in the event of a serious illness or disability.
→ Check out our article on the different types of insurance.
2. Reassessing your mortgage needs
Like the rest of your life, your mortgage needs will inevitably evolve over time. Let’s explore them together.
When should you renew your mortgage?
You’ll receive a mortgage renewal notice at least 21 days before the end of your current term. But there’s nothing stopping you from contacting your bank sooner!
Did you know that you can renew your mortgage up to six months before the end of your current term? This means you can set the conditions of your next term immediately and benefit from a guaranteed interest rate, regardless of increases in the market. And if the interest rate drops? Consult your advisor to review your terms and conditions.
Note that if you want the new terms and conditions to apply before the official end of your current term, this would constitute a pre-term (or early) mortgage renewal.
Fixed, variable or hybrid rates: which should you choose?
Whether fixed, variable or hybrid, each type of rate has its advantages and disadvantages. While there’s no one-size-fits-all solution, it’s important to consider your financial flexibility, risk tolerance and economic situation before choosing the right type of rate.
When making your decision, consider the following factors:
- A fixed rate remains the same throughout the term of your mortgage, protecting you from future increases.
- A variable rate allows you to take advantage of a lower rate from the outset and benefit from possible reductions over the course of your term. It can also be capped so that you don’t exceed a certain limit in the event of an increase.
- A hybrid rate is a combination of the two: your mortgage is divided into segments, each with its own characteristics and rate.
→ Check out our article on different mortgage rates to help you make an informed decision.
How do you choose your mortgage term?
Choosing your mortgage term is an important step. It will determine your interest rate and the type of rate applicable for the specified period.
A mortgage term generally varies between 3 and 10 years, though terms of 3 or 5 years are more common. The shorter the term, the sooner you need to renew your mortgage and negotiate a new rate. With a longer-term mortgage, you benefit from the conditions initially set for a longer period of time. This stability protects you from any rate increases that may occur as a result of a rise in the policy interest rate.
It’s not just rates that should influence your decision – ask yourself if you plan to move or sell your property in the next few years. Is the answer yes? Then you may want to choose a shorter term to avoid the penalty for early repayment. For example, if your term is five years, but you sell your property after two years, you’ll have to pay a penalty.
Should you modify the frequency and amount of your payments?
If your budget can handle it, paying off your mortgage sooner could be to your advantage. Why? Because you’ll save on interest charges and reduce the amortization period at the same time.
To do this, you can either accelerate the frequency of your mortgage payments – for example, every two weeks instead of monthly – or increase the amount of your payments. When renewing at the end of your current term, you can also make an early repayment, with no penalty or limit on the amount.
You can also opt for a debt consolidation mortgage, which means increasing your payments to cash in some of the value of your property and pay off higher-interest debts.
Example of mortgage payment calculations
Marie and Andrew became homeowners in 2019, securing $300,000 in financing to purchase their property. The couple chose a five-year term with a 25-year amortization period, maturing on May 1, 2024. With a fixed rate of 3.49%, their current mortgage payments are $1,496.23 a month (principal and interest).
When they renew in May 2024, the balance will be $258,792.55. And with interest rates having risen since 2019, their mortgage payments will potentially be higher. Here’s how they might look with a 4-year term.
Impact of rate increases on monthly payments
| Rate |
Monthly payments (principal and interest) |
|---|---|
| 4.49% |
$1,630.08 |
| 5.49% |
$1,769.73 |
| 6.49% |
$1,914.88 |
Source: Mortgage calculator from the Financial Consumer Agency of Canada. Calculations as of December 2023.
3. Ensuring your mortgage payments are in line with your budget
Before you make any final decisions on the terms and conditions of your mortgage, it’s important to make sure that your payments fit within your budget. You may find it necessary to reduce other expenses to make this happen. To assess your situation, use the Canadian government’s calculator (external link).
→ Click here to view the full Property Perspective episode on mortgage renewal.
Taking out or renewing a mortgage requires careful consideration and shouldn’t be taken lightly, but that doesn’t mean it has to be complicated. By following these simple steps, you’ll find it easier to make better-informed decisions.
Visit our page on mortgage renewal to find the right mortgage for you.