The hard truth is that anyone renewing their 5 year old mortgage right now is getting a higher interest rate, meaning their mortgage payment is going to go up.
If you’re in that situation, it can be a painful truth to face. Technically you qualified for your current mortgage at 5.25%, the stress test rate. But that doesn’t mean you can afford to pay an interest rate of 5.25% or higher now.
So what are your options?
It will be hard to keep your budge intact with that higher payment, especially given current inflation levels. There are, however, a few ways to lower your mortgage payment and give your budget some room to breathe.
- Lower your new mortgage payment by extending amortization
- How to re-amortization lower mortgage payments?
- If you made any prepayments on your mortgage…
- You may still have time to prepay your mortgage and create some breathing room at renewal…
- Can I re-amortize my mortgage out to 25 or even 30 years?
- I can’t prepay and I can’t re-amortize… what can I do?
Lower your new mortgage payment by extending amortization
When you bought your home, you signed up for a 25 or 30 year amortization. That means interest for the loan on your house was calculated with the assumption that you would pay it off in 25 or 30 years.
To keep things simple, let’s say your original amortization was 25 years.
Let’s also assume your mortgage term (which is different from amortization) is 5 years. That means that, after 5 years, you’re allowed to renegotiate your mortgage contract (although certain restrictions apply).
So your mortgage is nearing the end of its term, that 5 year period. You’re due to renew your mortgage for another 5 years with your current lender, or switch to a new lender (maybe they have better rates and prepayment options).
At renewal, you have 20 years left in the life of your mortgage.
The most effective way to lower a mortgage payment is to extend that amortization back out to 25 years.
How to re-amortization lower mortgage payments?
Over the last 5 years, you’ve paid off a significant chunk of your original mortgage loan. The balance remaining is lower. Stretch that remaining balance out another 5 years and your monthly payment will drop.
Hard to visualize? Hopefully this graphic helps:
Let’s do some math.
You bought your home for $400,000. You put down 20% ($80,000). So your original mortgage loan was $320,000.
Let’s say your interest rate was 3.8% (based on the 2017 average from CMHC). With a 25 year amortization, your mortgage payment was $1648.75 monthly.
In the last 5 years, you paid $42,405.98 off of your original mortgage loan. Your remaining mortgage balance is $277,594.02.
Now you’re coming up for renewal and the new rate the bank offered you is 5.2%. Your new monthly mortgage payment will be $1,854.24.
What happens if you extend your amortization from 20 years to 25 years?
Your monthly payment on a mortgage balance of $277,594.02 at 5.2% interest over 25 years would be $1,646.25.
That’s actually $2.50 less than your original mortgage payment!
Now, if only everything were that simple…
When you switch mortgage lenders, it’s usually a simple process with no fees.
However, if you’re also hoping to re-amortize, there may be transfer fees or higher interest rates. It depends on the lender you’re with, the lender you’re transferring to, and your financial situation when you transfer.
Let’s go through a few mortgage transfer options, starting with the cheapest way to switch and maybe lower your payment…
If you made any prepayments on your mortgage…
Most mortgages give you the option to pay down your mortgage principal directly. Usually you’re allowed to prepay between 10% and 20% of your original loan amount each year.
You may also have the option to double up on your mortgage payments whenever you want.
We’ll dive deeper into the power of prepayment in a later post, but here’s a small example of what prepayment can mean for you at renewal.
Let’s go back to our example above. A $320,000 mortgage at 3.8% for 25 years is a $1648.75 monthly payment. After 5 years you owe $277,594.02.
At renewal, your interest rate goes up to 5.2% and your mortgage payment will be $1,854.24.
Let’s say you made lump sum prepayments of $2000 each year for the last 5 years. That drops your balance owing to $267,594.02.
Technically you would have 18 years and 9 months left to pay off your mortgage (instead of 20 years) because of your prepayments.
But if you wanted to reduce your new mortgage payment a bit, most lenders will let you extend your amortization back up to 20 years (what it would have been at renewal without prepayments).
That new balance, $267,594.02 amortized over 20 years at 5.2% is $1,787.44. That’s $66.80 less a month.
Does that feel a little better?
More prepayment now means more potential to reduce your monthly payment later if you need it.
You may still have time to prepay your mortgage and create some breathing room at renewal…
Do you have savings or investments you can access before your mortgage renews?
This may be tough to hear, but what about your boats, ATVs, Ski-Doo’s and so on? Can you sell one to fund a mortgage prepayment?
How much of a bonus are you getting this year? How much was your tax return? Are you able to work overtime?
Depending on how much time you have left until renewal, there could be many options to help you create space in your mortgage without drastically altering your lifestyle.
Find out how much you’re allowed to prepay each year (usually between 10% and 20% of your original loan amount). Once you have the cash ready, make the additional payment.
If you want to calculate how much room that prepayment is going to create, you can use this free app, My Mortgage Planner.
You can also talk to your mortgage broker and work with them to find out exactly how much your prepayment will save you at renewal.
Can I re-amortize my mortgage out to 25 or even 30 years?
Some lenders will let you transfer your mortgage and refinance at the same time. This allows you to re-amortize and stretch your outstanding balance to 25 or 30 years, dropping your payments even more.
You saw in the example at the start of this article that re-amortizing from 20 to 25 years, even at a higher interest rate, brought your monthly mortgage payments from $1648.75 to $1,646.25.
But there are fees associated with a transfer like this. If your total fees are less than $3000, the lender may cover them for you.
This is where your mortgage broker is able to provide expert advice based on your specific situation.
I can’t prepay and I can’t re-amortize… what can I do?
All is not lost. You’re just playing the long game.
Most banks and lenders will work hard to keep their current clients. But not right away.
They may offer you a mediocre rate and terms as you approach renewal. But they can do better. Sometimes they can do much better. You just have to apply the right pressure. Here’s how…
Get a commitment letter from another lender with better rates and terms. Take that letter to your lender and ask them to match or beat your new offer. If they don’t, switch your mortgage. Either way, you win.
How do you get a commitment letter from another lender?
Go to your mortgage broker and let them know your situation.
Tell them that you can’t make a prepayment and you can’t re-amortize your mortgage at renewal, but you’d like to see if you qualify for better rates with other lenders.
Be upfront about your intentions, though. Let them know that once you get a commitment letter from a lender, you’re going to take that letter back to the bank and see if they’ll match or beat it.
Some mortgage brokers won’t do this. And that’s fine. They have to prioritize their time how they see fit.
If you need a mortgage broker to help you rate shop like this, call me. I’m more than willing to help you get a better deal, even if it’s from your bank.
Let’s call it a “Renewal Consultation,” completely free of charge, meant to help you create a little more breathing room when your mortgage renews.
Start by filling out my mortgage application (we need all the details you can provide in order to provide an educated opinion and find you the best solution based on your personal situation).
Or call me. 705-358-5635
All the best,
Sherwood Mortgage Group #12176
P.S. If you need to see the numbers for yourself, you may enjoy “My Mortgage Planner App.” Download the app, create a profile, then start messing around with different scenarios to see what your options are.
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