Preparing for Uncertainty: How to Renew Your Loan Amidst Changing Interest Rates

No one knows if the Bank of Canada will decide, in the short or medium term, to raise its key rate again, or when this could happen.

• The central bank has repeatedly suggested that it will start raising its rate again if it considers it necessary to calm inflation.
• The likelihood of a further rise has increased recently because inflation, which had slowed significantly, is showing further signs of acceleration.
• But at the same time, some economists expect rates to fall quickly, perhaps even starting in spring 2024.

So, how can you prepare to renew your loan in this uncertain context?

The first step is to estimate the amount of your future mortgage payment according to the rates currently in effect.

Let’s take the example of a $300,000 mortgage financed over 25 years.

• With a rate of 3%, the monthly payment for this mortgage is $1,420.
• With a rate of 6%, which reflects current mortgage conditions, the payment would then increase to $1,920, or $500 more per month.

Once you have made this calculation, check if your budget can absorb this increase.

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Then repeat the same calculation with an interest rate of 8%.

• Your lender will do the same thing to assess your ability to withstand future rate increases.

If you don’t have the ability to increase your payments, one option would be to extend the term of your mortgage.

• For example, if the remaining amortization term on your loan is 20 years, you could refinance to 25 years, which would lower your payments.
• On the other hand, your loan will cost you more in interest.

Then contact a mortgage broker.

Do not accept the default renewal offered by your current lender. Shop.

A mortgage broker can help you compare offers from several lenders, including those from large banks and also those from virtual lenders, which do not have physical branches.

Comparing offers can make a big difference.

Let’s look at the $300,000 mortgage financed over 25 years.

• If your bank offers you a renewal at 7%, but another lender offers you a renewal at 6%, the difference between these 2 proposals would be $180 on your monthly payment.

Another advantage of doing business with a mortgage broker is that their services are free for the borrower.

• This broker earns his remuneration from the commissions he receives from lenders.

The ideal is to start shopping several months before your loan expires, because the refinancing process can take some time.

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Choose the type of rate that suits you.

A fixed rate is often recommended for people on a tight budget who can’t handle an increase in their payments.

A variable rate is advantageous in a situation where rates fall. But it’s difficult to predict.

In the long term, some studies show that a variable rate costs less, on average, after several years. But your financial situation and your nerves must be able to withstand the variations.

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