Wondering what to do if you can’t afford your mortgage renewalAre you dreading your upcoming mortgage renewal? Maybe you fear defaulting on your mortgage and losing your home due to higher payments. If so, you’re not alone.
According to the Canada Mortgage and Housing Corporation (CMHC), an estimated 2.2 million mortgages will face drastically higher interest rates upon renewal. This is mainly due to the Bank of Canada’s (BoC) aggressive rate hiking measures, which began in early 2022 to battle high inflation.
The BoC’s latest annual Financial Stability Report notes that monthly payments may rise by as much as 60% over the next few years for homeowners renewing their mortgages. Soaring living costs have further added to the financial pressure homeowners face.
However, with some careful planning, you can weather this financial storm. In this guide, we’ve assembled a list of strategies to help you manage your mortgage payments at renewal.
Options for managing mortgage payments at renewal
Below are some options to consider if you anticipate struggling with payments once you renew your mortgage. These options range from short-term fixes (such as postponing payments) to long-term solutions (such as extending the mortgage amortization). None involve giving up your home.
1. Get a fixed-rate term
Are you currently paying a variable-rate mortgage? If so, opting for a fixed-rate term on your renewal date may reduce your monthly payments.
While variable-rate (and adjustable-rate) mortgages typically have lower interest rates, there have been periods when their fixed-rate counterparts have been the better bargain. For example, during the COVID-19 pandemic, you could get a lower rate on a fixed-rate mortgage than one that’s variable.
Currently, banks offer lower rates on select fixed-rate mortgage terms than variable-rate mortgages. In a June 2024 survey conducted by CTV National News, 59% of mortgage brokers said that a short-term fixed mortgage is the right choice for many mortgage holders. Some brokers believe a three-year mortgage is ideal because it’s relatively cheap, and you’re not locking in a rate for a long time.
Due to these pricing trends, switching from a variable-rate mortgage to a fixed-rate mortgage may be worthwhile. If you can secure a lower rate than the one you’re paying today, your payments will drop, giving you more breathing room in your budget. Furthermore, you can refinance at an even lower rate if mortgage rates decrease in the near future.
However, remember that interest rates can change at any time. So, review both variable- and fixed-rate options to determine which translates to smaller payments at any given time.
2. Ask for a payment deferral
Once you renew your mortgage at a higher rate, your regular payment will increase immediately, leaving little time to prepare if you’re in a financial bind. However, with a payment deferral, you can obtain short-term relief until you get back on track.
Your lender may allow you to skip mortgage payments temporarily if you’re grappling with a financial setback, such as a car repair or hefty medical bill. You could delay your payments for up to four months, after which you resume paying according to your regular schedule. The deferred payments are not considered late, so your credit score won’t be negatively affected.
Remember that getting a deferral doesn’t mean those payments are forgiven—you’re still responsible for paying the principal and interest charges. Your lender will usually add the deferred interest to your principal at the end of your deferral period, resulting in a higher balance. As a result, you’ll pay more interest over the life of your mortgage, which is the main drawback of deferring payments.
Visit the Financial Consumer Agency of Canada website to learn how mortgage payment deferrals work.
3. Extend your amortization period
One of the most common methods of lowering mortgage payments is to lengthen the amortization period. For example, if your amortization schedule is 20 years, you could extend it to 25 years.
Your monthly payment amount will decrease because you’re spreading your mortgage principal over a longer time frame. However, the total amount of interest you pay over the life of your mortgage will increase, and it will take you longer to pay it off. Your home’s equity will build up slower, hampering your ability to borrow against your property.
Extending your amortization also breaks your mortgage contract, which means you’ll need to requalify for a new loan. Doing so may be difficult, depending on your current credit score and lender’s eligibility requirements.
4. Request a special payment schedule
Short-term payment deferrals can be helpful if experiencing a temporary financial emergency. But if you’re struggling to keep up with your mortgage due to a job loss or other prolonged setback, you may need relief for a longer time.
Depending on your lender’s policies, you may qualify for a special payment arrangement. For example, they may allow you to delay your payments for an extended period or temporarily reduce your payment amount. In particular, CMHC-insured mortgages allow lenders considerable flexibility to negotiate alternative payment plans with borrowers. Contact your lender to see what options are available.
Remember: interest will still accrue on deferred payments. And smaller payments mean it’ll take you longer to become mortgage-free.
5. Negotiate a lower interest rate
The lower the interest rate you can obtain at renewal, the more money you’ll save on future mortgage payments. As Investors Group shows in this mortgage renewal example, even a difference of 0.3% can save you thousands of dollars.
Banks and other mortgage lenders aim to maximize profit, so the rate they initially offer you upfront is never the lowest one they’d be willing to grant. You must flex your negotiation skills to get the best deal possible.
Before negotiating with your lender, ensure you’re well-prepared and informed about the competition. Don’t assume customer loyalty will convince them to give you a cheaper rate. In most cases, your lender’s rate already has a loyalty discount applied.
Get rate quotes from other financial institutions like banks, credit unions, and monoline lenders. Then, present them to your lender and ask if they can match or beat them. If they cannot, they risk losing you as a customer.
However, be mindful of your credit score and income, too. Generally, the better your financial standing, the higher your chance of persuading your lender to give you the rate you’re asking for.
6. Consolidate your debts
Do you have other debts you’re responsible for paying? If so, they could be the culprit behind your mortgage affordability troubles. Credit cards, lines of credit, and personal loans can be costly due to the exceptionally high interest rates they charge, leaving little room for mortgage payments.
One option for managing high-interest debts is consolidating them under a single loan, ideally with a lower overall rate than you currently pay. Under this strategy, you’ll have only one fixed, affordable payment to make each month. As a result, you’ll have more money to dedicate to your mortgage.
There are different ways to combine debts. Some popular options include a debt consolidation loan, home equity line of credit, or second mortgage. A lesser-known method is filing a consumer proposal, a type of insolvency program offered by the federal government (more on this later in the article).
Speak with your financial planner, banking representative, or mortgage lender to see if debt consolidation can help you save money and keep up with your mortgage payments.
7. Switch to another lender
Your lender may not be willing to accommodate you with the interest rate and terms you’re seeking during your mortgage renewal. If that’s the case, it may be worth switching to another lender who can offer you a better deal.
Finding a new mortgage lender can take some time, so start your search well before your current terms expire. If you need assistance, consider hiring a mortgage broker. A seasoned and knowledgeable broker can guide you through the process, saving you time and energy.
There are some things to keep in mind when transferring your mortgage to a new lender:
- Typically, you can’t change your mortgage balance and amortization—only your interest rate, prepayment options, and payment frequency. Changing the mortgage amount or amortization period requires refinancing.
- You may need to pay several fees, including appraisal fees, assignment fees, discharge fees, and legal fees. However, your new lender may be willing to cover some or all of them.
- Switching mortgage lenders is more complex if you have a collateral mortgage. You will have to hire a real estate lawyer to complete the transfer.
Filing a consumer proposal: a way to reduce your debts so you can keep up with mortgage payments
If you have a large amount of unsecured debt, such as credit cards, payday loans, or medical bills, handling a mortgage may be impossible. But if you can significantly reduce your debt load, you’ll have more money available for mortgage payments. That’s exactly what you can achieve by filing a consumer proposal.
A consumer proposal is a federal debt relief program that’s available to Canadians who are legally insolvent, meaning they cannot pay their debts as they come due. Under a consumer proposal, you negotiate a new payment plan with your unsecured lenders, paying a percentage of what you owe. In other words, yu pay the creditors what you can afford, and when complete, the balance of your unsecured debts will be forgiven.
Filing a consumer proposal is similar to filing bankruptcy. However, the former offers several advantages, including not having to give up any of your assets, including your home. Under bankruptcy, you must pay your creditors the non-exempt portion of your home equity. If you’re unable to do so, you may have to sell your home to come up with the money.
How to make the most of your mortgage at renewal time
Here are some tips for managing your upcoming mortgage renewal and ensuring you can afford your new payments.
Start planning early
Is your mortgage lender a federally regulated financial institution? If so, it must provide a renewal statement at least 21 days before your term expires. The renewal statement contains critical details about your new mortgage term, including the interest rate, term length, payment frequency, and fees.
Many lenders will send you a renewal statement earlier—sometimes, you’ll get 30 to 45 days before your term ends. However, if your mortgage renewal is approaching and you’re concerned about increased payments, start planning even sooner.
Figure out your mortgage needs
The weeks and months before your renewal date are a good time to assess your mortgage and determine whether it meets your needs and goals.
Here are some points to consider:
- Can your budget cope with the expected new payments?
- How high is the rate your lender offers compared to the competition?
- Do you want to change the payment frequency?
- Are you happy with the services provided by your current lender?
- Are you pondering about consolidating your debts to save money on interest?
- Do you want to make a prepayment to lower your balance and future payments?
- How long do you plan to stay in your home?
- Are you planning to refinance if rates drop in the future?
Decide whether to stay with your current lender
Remember: when your mortgage term expires, you’re not obligated to renew with your current lender. Switching to another lender is perfectly normal and acceptable if you find one that better meets your mortgage needs.
If you’re facing a massive increase in payments upon renewal, consult with other lenders, either independently or with help from a mortgage broker. Ask what rates and terms they offer to see if you can obtain a lower rate and better mortgage terms and features.
If you receive an appealing offer, remember to obtain a personalized quote. You can use it as leverage when negotiating with your current lender, who often asks to see it as proof.
Ask for a rate hold
If you’re happy with the rate you get with your existing lender but worried that it will rise before your renewal date, you can ask them for a rate hold.
A rate hold locks in the rate you’ve chosen for a limited time, sometimes up to 120 days, protecting you from rising rates. But you can still renegotiate for a new lower rate before your renewal date arrives, giving you the best of both worlds.
The bottom line on mortgage affordability and renewals
If you anticipate struggling with mortgage payments upon renewal, plan for a solution two or three months before your renewal date. Identify your mortgage needs, budgetary constraints, and financial goals ahead of time to see where you stand. Don’t wait until the last week or two to get started.
Various relief measures are available, including payment deferrals, amortization extensions, and special payment arrangements. Switching lenders and negotiation tactics can also work. You’ll have to decide which is appropriate for you based on your circumstances.
Sometimes, people can’t afford their mortgage because other debts overwhelm their budget: credit cards, lines of credit, payday loans, etc. If that describes you, a debt relief program, such as a consumer proposal, can help you reduce these liabilities, freeing up your cash flow for mortgage payments.
Learn more about debt relief solutions available in Canada.
