Tax Tip Thursday

Mortgage Renewals

We’re back! After a much-needed post-tax-season break, we are here to talk about mortgage renewals.

I have read several interesting articles over the last couple of years about mortgage renewals and the potential impact on people’s finances.

I have a few clients that have been bringing it up as well — it’s a pretty hot topic right now.

Start Planning

I just want to make sure people start planning for it if they have not been hit already. Rates are skyrocketing!

Basically, the problem is that there are a LOT of people that have mortgages coming for renewal over the next couple of years and the rates are going to be a LOT higher than what they are now. This goes double if you haven’t renewed in a couple of years.

Some of these renewals are for cottage properties bought during the craziness of COVID. One of the problems people could be facing if they purchased during covid, is that their property may not be worth as much as what they paid for it. If you find yourself in that situation, your best strategy will likely be to renew with your current mortgage holder, as they are less likely to require an appraisal (although not unheard of to require one).

I have spoken to a lot of people who have mortgages below or just above 2%.

Those people are going to be facing HUGE increases in their monthly payments.

Much the same as I try and prepare tax payers to their inevitable tax bills each year, I also try and help people prepare for significant changes in their personal income or expenses. If you do not plan for it, the impact could be debilitating!

Depending on your credit, income, size of mortgage, etc…. you could see 5% or more as a current mortgage rate for 5 years fixed (the variable rate is much higher right now).

Example

As a basic example. If you have a mortgage of $400k with a 30-year amortization, your new payment with a rate of 5.14%, will be just under $2200 a month. That same mortgage at 2% is just under $1500 a month. This means that you could easily be facing almost a $700 or 50% increase in your mortgage payment. This is significant!

If your mortgage is bigger, the impact will be bigger.

With an $800k mortgage with a 30 year amortization, 5.14% rate, your payment be just over $4700 as opposed to $3400 at 2%. You will be looking at a $1300 increase or almost a 40% increase.

Could you handle it if your monthly mortgage payment went up by 50%? 

For a lot of people, this could be a big problem.

What Can I Do?

There’s a few things that come to mind:

  • Talk to your mortgage holder now. Make sure you know when it renews and what options they can offer you. They may have some ideas.
  • If you are on a 25 year amortization, you might be able to extend it to a 30 year amortization. While not optimal, it could lower your payments. This can be temporary and you can return to a lower amortization on your next renewal.
  • If you are lucky enough to have some liquid investments or savings, you MAY want to consider paying down your mortgage when it comes up for renewal. This will also lower your monthly payments.
  • Seek out additional sources of income – if it is a cottage, maybe convert to a rental property.
  • Review your budget and see if you can cut back on expenses
  • Worst cased you may want to consider selling the property.

The important thing is to know what is in front of you and identify options for yourself.

While we cannot help you renegotiate your mortgage, we can help you make sure that your taxes are all in order and that there are no unhappy surprises on that front, and we can make sure you’re not overpaying anywhere so that you have more money available to make those new, enormous mortgage payments. Book your appointment with us today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.