The right mortgage strategy is like cutting the right wire (wait, not the red one!)
Do higher mortgage rates have you feeling like a budget explosion awaits?
Here are ways to help diffuse both your expectation of mortgage budget trouble and even actual budget trouble.
While it may seem like your lender contract is wired against making major changes, like lowering your payments or switching to a better rate — you may have more flexibility than you think (and if you don't, that's another thing to solve).
Depending on your situation, an expert broker familiar with those (mortgage) wires may have advice that not only helps you ease a daunting budget situation but can also help you save more money than you thought possible.
Avoid hitting your trigger point (worse than a trigger rate).
"Of borrowers with a variable-rate, fixed-payment mortgage, we estimate that about 50% — or nearly 13% of all Canadian mortgages — have already reached their trigger rate."
– Bank of Canada, Nov. 2022
Do you have a fixed-payment, Variable-Rate Mortgage (VRM) with a Big Bank? By now, you are likely well aware of the Trigger Rate lying-in-wait in your mortgage terms, where your payment no longer covers the interest portion. If the lender has contacted you with options, it's important to consider them — and then talk to us about other options that may be available to you.
Here's the ticking-time-bomb part: For your static payments, once you hit your trigger rate — if you or your bank decide to let your current payments ride (not adjust them upwards) or you wait to put down a lump sum, lenders may push the unpaid interest onto your mortgage balance, called negative amortization.
So while you're going about your day, your mortgage may be ticking up until it's too big for your budget to handle when it comes time to renew, or before that, if your balance surpasses a critical point.
For insured mortgages, if your balance exceeds 105% of your home's Fair Market Value (FMV), or 80% for uninsured mortgages, you'll be required to take immediate action or be in default. With home prices trending down and qualifying rates higher, you may run out of options to handle your payments.
Lenders and insurers may work with those who are having trouble coping with rising payments, though it's taken on a case-by-case basis, and you'll have to prove that you can no longer afford your mortgage payments.
If you've hit your trigger rate (or even before that!), talk to an expert True North Mortgage broker for targeted advice. They'll be able to look at ALL your options — such as switching lenders or to a fixed rate, or finding the right strategy to reduce debt. Big Banks are limited in the solutions they're able to offer you.
Clear some room for your floating variable-rate payments.
Feeling maxed out by the payment increases of your Adjustable Variable-Rate mortgage payments (ARM)?
Here are two options during your term (more may be open to you if you talk to an expert True North broker). They involve extending your amortization, which means you'll likely pay more interest over time, but if monthly cash is king, you'll get some needed budget room.
- Have you paid lump sums on your mortgage during your term? Without having to refinance and pay the penalty or change your rate, you may be able to extend back to your original amortization (minus time lapsed) to lower your payments. A fee for this extension may apply (THINK Financial doesn't charge a fee for this service).
- Or, you may be able to refinance back up to 25 years (or even 30 years or more) for lower payments if you're already a few years into paying down your mortgage. You'll need to re-qualify and incur some costs, such as a 3-month interest penalty and related fees (and refinance rates may be higher than your current rate), but it may be worth your while to lower payments.
In the future, if your mortgage has flexible pre-payment options, you can draw your amortization back down again (through additional payments or lump sums) if rates go lower and you have more budget room.