Extending the mortgage term could keep payments under control even if rates rise

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Canadian homeowners could be in shock when it comes time to renew their mortgage, as rising interest rates mean their monthly loan payments will likely rise too.

This is particularly unwelcome because rising prices for gasoline, groceries and other basics are already eating away at household budgets.

Experts say extending the amortization period of your mortgage could help control your monthly payments even if you face higher interest rates, but beware, this comes at a cost as you will end up paying interest for a longer period.

Mike Rocha, director of mortgage experience at Scotiabank, says customers renewing today who may have paid interest at less than 3% or even 2% face higher rate potential at 4%.

“There is definitely going to be a potential payment shock with some customers,” he says.

The amortization period is the period during which you repay your loan. This means that if you took out a mortgage five years ago to buy your home with an amortization period of 25 years, you have 20 years of payments left.

By extending this amortization period when you renew your mortgage, you could take the remaining balance on your loan and pay it off over another 25 years, or even longer, depending on your situation. The move would lower your monthly payment, but due to the extra time it takes to pay off the loan, you’ll end up paying interest over a longer period.

If you’ve made additional payments in the past and are ahead of your original payment schedule, Rocha says you should be able to go back to your original amortization schedule. However, to extend your amortization period beyond the originally contracted period, he says the process is a little more complicated.

“You have to qualify, you have to check your credit. There may or may not be an assessment, it depends on the lender. It’s a longer process, that’s for sure,” he says.

While those with variable rate mortgages already saw their rates increase when the Bank of Canada decided to raise rates, those with fixed rate mortgages will not see an increase in the rate they are paying. until the time of renewal.

According to data compiled by Ratehub.ca, discounted five-year fixed mortgage rates in July 2017 averaged 2.24%. And while some were able to sign five-year fixed mortgages at rates below 2% last year, offers from major Canadian banks are now north of 4.5%.

In its review of the financial system last week, the Bank of Canada noted that rising rates could mean a tightening of household budgets.

The central bank has launched a hypothetical scenario in which five-year variable and fixed rate mortgages taken out in 2020 and 2021 renew at median rates of 4.4% and 4.5%, respectively, in 2025 and 2026.

In its simulation, the Bank of Canada indicates that households who took out a mortgage in 2020-2021 would see a median increase of $420 or 30% in their monthly mortgage payments at renewal.

However, Ottawa mortgage broker Kelly Wilson noted that while rates are higher today than they have been in recent years, they are still low in a longer-term context.

“I bought my first house at 21 and paid 8.3%, that was my first interest rate,” said Wilson, managing partner of the Wilson team.

Wilson said extending your amortization period will mean you pay interest for a longer period, but it could free up money now to pay off other, more expensive debts or save for retirement. which could generate a higher return than what you pay in interest.

“It’s still cheaper to borrow than anywhere else you can borrow,” she said.

Rocha said if you’re already extending your amortization period, you can also consolidate other, higher-interest debt into your mortgage.

“If you’re going to open the hood anyway and do a refinance, you might as well take advantage of it and do a debt consolidation, if there’s stuff out there and you have the equity,” he said. .

Rocha added that it’s always helpful to speak to a financial adviser who can review your overall situation.

“A financial adviser will be able to look holistically at the financial situation of the person, the individual, and then be able to apply judgment where it makes sense,” he says.

This report from The Canadian Press was first published on June 16, 2022.

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