How to manage your mortgage renewal during a time of rising rates
Being a homeowner with an impending mortgage renewal can be pretty nerve-wracking.
The source of that anxiety all comes down to interest rates.
If rates happen to be low, that stress usually quickly dissipates into sighs of relief. After all, you won’t be dishing out more of your hard-earned money towards monthly mortgage payments.
But what if your renewal comes about at a time when rates are continually on the rise (we’re talking about you, 2022)?
“When rates start climbing, don’t leave your renewal to the last minute,” advises Educators Agent-Regional Direct Nick Rao. “While it can be tempting to hold out on the possibility that rates might start dropping, you could instead be setting yourself up to shoulder even more of a financial burden should rates continue to rise. You only have to look at the repeated rate increases this year to see how putting your mortgage renewal on the backburner can actually backfire.”
That’s why Nick recommends looking into your mortgage options up to 4 months ahead of your renewal date.
“When rates are on the rise, there’s no getting away from the reality that you’ll be paying more for your mortgage come renewal time,” continues Nick. “How much more depends on what that (higher) rate ultimately ends up being. But don’t renew without doing a bit of comparison shopping first.”
When exploring your mortgage renewal options, be sure to research beyond the rate of interest.
Nick goes on to explain, “Let’s say you’re coming to the end of a 5-year fixed term. Instead of automatically locking in for another 5 years, consider switching to a variable rate for a shorter term. That’s because in higher-rate environments, variable mortgages tend to offer the lowest rates of interest. If you prefer to renew at a fixed rate, you may also want to opt for the shorter term—that way you’re not stuck paying a higher rate, should rates happen to fall within that timeframe.”
In the interim, there are proactive things you can do now to soften the impact of higher mortgage payments later (i.e., after renewal).
“First, find out approximately how much more you’ll be paying in order to rebalance/reprioritize your monthly spending,” says Nick. “To get a ballpark number, check to see where interest rates are currently, and then use a mortgage calculator to figure out the difference. If that gap severely cuts into your cash flow, look for areas in your budget where you can either cut or scale back in order to compensate.”
For those who are lower on the pay grid/with a tighter monthly cash flow, consider stretching out your amortization.
“Stretching out your amortization can be another way to keep your mortgage payments within an amount you can comfortably afford,” explains Nick. “Keep in mind this involves paying more interest over the long-term. Plus you may have to refinance, which means going through the mortgage stress test all over again. However, it might be a process worth going through if you’re faced between keeping your home and having to sell.”
Tip: Consider making a lump sum prepayment toward the principal at renewal time in order to minimize any increase in your monthly mortgage payments due to higher rates.
If refinancing your mortgage is something you’re seriously considering, be sure to maximize this option by doing this.
“Once you’ve made the decision to go the refinancing route, this is your chance to consolidate other (high-interest) loans such as car and credit card payments. That way you’ll be dealing with just one monthly payment versus several. This will most likely free up additional monthly cash flow, which you can then put away to build up an emergency fund or save for future goals. Because while you never know what the future may bring, one thing is for certain—being financially prepared puts you in a better position to handle whatever comes your way.”
Tip: If you are retiring soon, be sure to renew your mortgage before retirement, as your working income will open you up to more mortgage options compared to trying to refinance in your pension-income years.
Get the full picture on your mortgage renewal by reaching out to Educators Financial Group.
From pay grids to your pension plan, we have a unique understanding of how your pay structure works during your working years and in retirement. It’s the kind of insight that can truly make a difference when it comes to providing you with a mortgage (renewal) option that meets your specific needs—particularly during a time of rising interest rates.
Let’s chat about your mortgage renewal options
Plus be sure to check out:
The top 10 tips for getting the most out of your mortgage renewal
Fixed vs. variable: how to decide which mortgage rate is right for you
Rising interest rates and debt: what you need to know
Brokerage License 12185