While fixed mortgage rates have come down from their 14 year highs, they are still considerably higher than there they were over the last five years. If you went with a 5 year fixed rate in 2018 that has not yet renewed, then your current rate is likely between 2.89% and 3.14% if you arranged your mortgage through us.

Now that rates are considerably higher, many wonder what kind of an impact this may have on their payments at renewal…or if they will even qualify. Higher rates will of course mean higher payments, but there are options to consider that could reduce your payment amount, therefore making it more manageable.

 

Today’s Lowest Mortgage Rates

Fixed mortgage rates currently range from 5.24% to 5.84% for a 5 year fixed or 5.54% to 6.29% for a 3 year. I know this is quite a range, but rates can vary significantly depending on purchase price, amortization, down payment percentage, type of transaction, etc. I explain this in detail in my blog on Why Different People are Quoted Different Rates 

If you are at the tail end of a mortgage at 2.99%, then lowest 5 year fixed rate is currently as low as 5.24% for a mortgage transfer. This applies to many situations (but not all unfortunately).

Let’s now look at how this will impact your payment. We’ll use the following as an example:

 

Original mortgage amount:    $650,000

Original amortization:             25 years

Current rate:                           2.99%

Current monthly payment:     $3,072.76

Balance at renewal:               $555,478.15 (assuming monthly payments with no additional payments made)

 

With today’s lowest 5 year fixed at 5.24%*, the new payment would be $3,722.51, or $649.75 higher than what you were previously paying. 

Yes, this is a pretty large chunk of change… enough to cover a decent car payment. While does impact monthly cash flow, the difference should be manageable for most. Not to mention, many are earning more money than they were five years ago. You would have also needed to pass the mortgage stress test at that time, which means you would have had to qualify as if the payments were 4.99%. If there was no such thing as the stress test then this would be much harder on those with mortgages renewing.

While no one is happy about the higher payments, most should at least be able to manage them without encountering financial hardship. However, not everyone will fall into this category. For those who feel the higher payment is too much of a stretch to comfortably manage, there may be options to lower your payment to relieve some of the financial pressure. 

 

Lowering Your Mortgage Payments

If your mortgage payment at renewal is higher than what you are comfortable with, you may want to consider increasing your amortization to 30 years. This would involve a mortgage refinance, which sometimes results in a higher rate. But even if the rate is higher, your payment would drop given that the loan is now stretched over a longer period.

For example, let’s say you have 20 years remaining on your mortgage with a balance of $700,000 at renewal. You’re offered a 3 year fixed rate of 5.84% to transfer your mortgage, which would give you a new payment of $4,922.66. 

The lowest 3 year fixed for a refinance is currently 6.14% with a 30 year amortization. Your payment would then drop to $4,225.20.  An increase in monthly cash flow of $697.46. This can mean the world of difference to anyone under financial pressure.

Even if the refinance rate was 6.34%, or half a percent higher, the monthly payment would be $4,313.59. Even with the higher rate, you’re still increasing your cash flow by $609.07 each month. 

Yes, this will result in paying more interest and delaying the overall payoff of your mortgage. But the purpose of refinancing in this case isn’t to save more money. It’s to increase your cash flow, therefore making your current finances a bit more manageable.

 

Qualifying To Renew Your Mortgage

Today’s qualifying rate is now 7.84% for the above example (2.00% above your mortgage rate).  Now that the qualifying rate is higher, what happens if you’re not able to qualify to renew your mortgage?

The worst case scenario is that you have to renew with your current lender without having to requalify. After all, you’re already qualified with them. But that unfortunately limits you to renewing with your current lender, which shuts you out of shopping around for the lowest mortgage rate at renewal. 

This is the biggest flaw of the mortgage stress test as it does nothing to protect people. All it does is forces people who already have tight budgets to pay higher rates. Not fair at all, and completely ridiculous. I could go on a long rant about how much this annoys me, but I already covered that in a previous blog on Why The Mortgage Stress Test is Flawed.

 

Getting The Lowest Mortgage Rate At Renewal

While there are times when renewing with your current lender will result in the lowest rate, there are often lower rates available with other lenders. Sometimes much lower. This gives you the opportunity to potentially save thousands! You can read more about this in my blogs on Everything You Need to Know About Mortgage Renewals and How To Maximize Your Savings At Renewal

 

Conclusion

While rates are quite a bit higher than what you may be used to, the expected increase in payment is still manageable for most people. While no one likes paying more in interest, we don’t have a choice in today’s world. And for those feeling the pinch, refinancing your mortgage up to 30 years may be exactly what you need to make it through. We can always revisit your mortgage again once rates start to fall… which is expected to happen over the next few years.

Everyone’s situation can be a bit different, and we will advise you based your specific needs when providing you with your best options.

I would also recommend reading the following of my recent blogs:

How to Choose The Right Mortgage Term

Should Variable Rates Be Considered in Today’s Market

 

*Mortgage rates can vary depending on purchase price, original purchase date, transaction type, equity, property usage, etc. You can read more about why in my blog on Why Different People are Quoted Different Rates.  Please reach out to us to find out the lowest rate available on the market for your specific situation.