Mortgage Renewal Storm: Empowering Steps for Canadians

The increase in mortgage rates will impact many Canadians' disposable incomes. But it doesn’t have to be as dire as some reports suggest. The key is in who you trust for advice and where you get your information. Welcome to The Flow Real Estate and Money Show, where we aim to equip Canadians with the tools and knowledge to make smart real estate and financial decisions.

The So-Called "Renewal Crisis"

The media has been buzzing about a looming mortgage renewal crisis, warning of impending financial doom. But let's break it down:

What’s Really Happening?

1. High Renewal Rates: The Office of the Superintendent of Financial Institutions (OSFI) reports that 76% of mortgages will renew by the end of 2026.
2. Variable vs. Fixed Rates: About 15% of these mortgages are variable rates with fixed payments, which could see significant payment increases.
3. Different Types of Variable Rates:
   • Fixed Payment Variable Rate Mortgages (VRM): Your payment stays the same, but more goes towards interest.
   • Adjustable Rate Mortgages (ARM): Your payments increase or decrease with the interest rates.

What Can You Do?

If you're facing renewal soon, you have options. Here are some steps to consider:

1. Understand Your Mortgage Type: Know if you have a fixed, VRM, or ARM.
2. Evaluate Your Situation: Consider your income, expenses, and any changes in your financial situation.
3. Consider Refinancing: This could extend your amortization period and consolidate debts, easing your monthly payment burden.
4. Talk to a Broker: They can provide tailored advice and explore different lenders and products.

Realistic Impacts and Mitigations

Reports often paint a bleak picture, but let's look at it more closely:

• Average Payment Increase: Even with significant interest rate hikes, the average payment increase may be around 20%, which is manageable for many.
• Stress Testing: Most borrowers were stress-tested at higher rates, meaning they should be able to handle these increases.
• Rate Reductions: There's potential for interest rates to drop, easing the pressure on mortgage payments.

Real Stories, Real Solutions

I’ve seen the effects of rate increases firsthand. Out of around 75 renewal applications this year, only two or three clients had to sell their property due to financial strain. Here’s what most people are doing:

Refinance and Extend

By refinancing, many have extended their amortization, which lowers monthly payments. This strategy can include:

• Consolidating high-interest debts.
• Setting up a home equity line of credit.
• Reducing overall expenses to improve cash flow.

Financial Planning

Having a clear financial plan is crucial. Here’s what you can do:

• Create a Budget: Track your income and expenses to understand where your money is going.
• Seek Professional Advice: Financial advisors can help you create a plan that fits your long-term goals.
• Audit Your Expenses: Regularly review and adjust your spending habits to stay on track.

Dispelling Myths

There’s a belief that high renewal rates will lead to widespread property sell-offs or foreclosures. But with real estate values holding strong, this scenario is unlikely. Here’s why:

1. Second Mortgages and Private Loans: Homeowners have options to avoid foreclosure.
2. Property Sales: If necessary, selling a property is a more viable option than foreclosure.
3. Managing Payment Increases: With proper planning, many can manage the anticipated payment increases.

Key Takeaways

Renewal vs. Refinance

Understanding the difference is vital:

• Renewal: Continue with your current lender, often with minimal changes.
• Refinance: Restructure your mortgage, potentially extending terms and consolidating debts.

Practical Tips

• Extend Amortization: Reducing monthly payments by extending the loan term.
• Plan and Budget: Regularly update your financial plan to adapt to changes.
• Seek Professional Help: Don’t hesitate to consult with mortgage brokers and financial advisors.