Tax Tip Thursday

Protect Yourself From Mortgage Changes!

There has been a LOT of talk and articles posted online about mortgages in the last 18 months as interest rates have made a historic climb.

Let’s talk about that and some ideas about what you can do if it affects you.

Purchase/Renew during COVID?

Anyone who bought a house or cottage in our crazy covid real estate market and/or anyone who took out a mortgage between late 2018 and mid-2022 is going to be faced with a significant upswing in their rate and payment when they renew. 2024, 2025 and 2026 could make for a very interesting real estate market when all those mortgages come due!

I have heard a lot of talk on the news and from mortgage brokers saying that when you applied for your mortgage, you had to qualify at higher rates – they do a stress test. The problem is that the qualification process and stress tests are based on basic formulae of your income, housing, and debt costs. As we all know, there are a LOT more expenses in our life than that, and in many cases, there really is not a lot of disposable income after paying our bills. So while it may have looked good on paper, the reality is a lot of people will not be able to afford another $1000 or $2000 a month.

Some people will see their payments almost double! So please take action now, regardless of when your mortgage renews.

Talk to whoever you got your mortgage from. Make an appointment now and be proactive. It is not too early, even if you have another year or even two left on your mortgage.

For example, if you have a $400k mortgage right now at 2% when you renew, you will be looking at roughly 6% in all likelihood. Your monthly payments will go from $1700 a month to $2600 a month. Do you have an extra $900/month sitting around for the added interest on your mortgage?

There is speculation that the rates will start falling again late 2024 or early 2025, but that will take time and they likely will NOT fall as fast as they went up, so be prepared!

What to Do:

  1. First thing – do a budget and see what you can REALLY afford.  I have done shows on budgets – the most important thing is to make it realistic!  Do not pretend you are going to suddenly change your spending habits significantly.  It takes a period of time to change those spending habits.  So if that is your plan, start now!
  2. If you do a budget – that is essentially an income statement for you personally.
  3. Prepare a balance sheet for your personal assets and liabilities.  Some people won’t know what that means.  Make a list of your assets and their values and a list of your debts.
  4. Make an appointment with your financial advisor or even the bank and take those documents with you and talk to them about what you can do when the mortgage comes due.
  5. Identify non-mortgage debt obligations that you can pay down in the short term to lighten the load on your other debt payments for when the mortgage comes due.
  6. Make sure your tax obligations are covered from a personal or small business perspective.  You do not want any surprise large tax balances that have to be addressed.  Make sure you are current.
  7. In severe situations identify assets that can be sold so the proceeds can be used to pay down your mortgage and reduce other debt payments possibly
  8. Consider selling your house if it is too expensive for you.  This is last resort for most people, but possibly the best solution.

Be Prepared!

I say this almost every week. The best thing you can do for the financial part of your life is be prepared! The most important message I would like to convey is to not bury your head in the sand and hope for a miracle.  Things are NOT going to change dramatically in the couple of years in terms of interest rates, so you are much better off coming up with a plan now so that you are prepared.  Hope for the best, but plan for the worst.

While we don’t specialize in helping with credit card debt, we do specialize in tax filings and getting your tax bill as low as possible. One thing you can do to be prepared and make sure you have the best odds possible going into your mortgage renewal is book an appointment with us to make sure your taxes are getting done right and on time.

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.