3 things to consider before renewing your mortgage

Everyone wants to get the best mortgage financing offer. Does that mean getting the lowest rate, the longest term or the smallest payment? The best strategy for one person isn’t necessarily right for another. Here’s why.

Updated February 9, 2021

Mortgage renewal is the perfect time to reorganize your finances based on your life goals. Here are 3 things to consider before settling on a mortgage agreement that’s right for you.

1. Your future plans

What term should you choose: 1 year, 3 years, 5 years or 10 years? Five years might not seem very long, but in a budget, it can be. To assess your needs and to prepare for the unexpected, have a clear idea of what’s coming up for you.

Thinking about moving?

“Anyone planning to move within 6 to 18 months might want to first consider an open mortgage. The interest rate will be a little higher, but there won’t be a mortgage penalty when the loan is closed. Depending on the situation and how much they have left to pay on the mortgage, the interest costs and so on, a closed loan can be a good solution,” says Patrick Champagne, a development advisor with Desjardins.

Planning expansions or renovations?

Depending on your equity (the part of your home you own), you might need mortgage financing or refinancing. Even if you’re not planning to start your project for another year or two, why not plan to use the best financing solution when you renew? A home equity line of credit - This link will open in a new window. could be a good potential solution.

Want to pay off your mortgage faster?

Set up an automatic “home” emergency fund in a tax-free savings account (TFSA) or another savings account by depositing the equivalent of 10% or more of the mortgage payments.

It can help you deal with unexpected expenses, and if you don’t end up needing that money, you can use it to repay part of your loan once a year:

  • Closed loan: up to 15%, penalty-free, of the initial amount borrowed or increase the payment, up to double the amount
  • Open loan: no limitations, but the interest rate is higher

What solution is best? It all depends on your financial capacity and how many years are left on your mortgage. For example, at a time when mortgage rates are 3% and RRSPs offer 6% returns, it might be better to take advantage of the returns, contribute to your RRSP and apply the tax refund to your mortgage.

2. Your financial commitments

To find out how much flexibility you have with your budget, calculate the monthly payments for your:

  • Vehicle
  • Credit cards and lines of credit (monthly minimums)
  • Personal loans (such as a student loan)
  • Other payments, like child support

Tip: We recommend keeping your financial commitments to no more than 35% of your gross household income. Your financial commitments include your mortgage payments and other home-related expenses (like property taxes, school taxes and energy costs).

Have you been finding it hard to balance your budget lately because your income has taken a hit?

Don’t worry: you’ll still be able to renew your mortgage.

Here’s some basic advice:

  • Review your budget based on your current situation and set up an emergency fund through automatic savings, if you haven’t already
  • Put off non-essential spending
  • Use credit wisely

The article Adjusting your budget during COVID-19 - This link will open in a new window. can help.

Do your mortgage payments make up a big part of your budget?

No matter what type of rate you choose (fixed or variable), your mortgage payments will always be a set amount.

For variable-rate mortgages, the portion of your payment that is applied to the principal will vary, depending on the rate.

Does your budget allow you to absorb payment variations?

The variable rate fluctuates based on the Bank of Canada’s key rate; mortgage payments go up and down throughout the term. Historically, the variable rate often turns out to be better in the long term in terms of interest cost and repayment of capital than 4- or 5-year fixed rates.

Do you share the loan payment, but don’t have the same financial flexibility?

Combining fixed and variable rates allows you to split the financing in 2 or 3 loan portions. That means the repayment will be individualized according to your preferences with respect to the term, amortization period, payment frequency and so on.

3. Housing market conditions

The real estate market was hit hard by the pandemic in 2020, and things are still shaky.

The second wave has increased economic uncertainty in the short term, but the start of vaccinations may create a more optimistic outlook by summer 2021.

This is the third consideration when renewing your mortgage, because interest rates fluctuate based on the country’s economic situation. Interest rates are currently at a low, and the Bank of Canada does not expect to increase rates until at least 2023.

The important thing is to fully understand your available options. Here are a few different possibilities to explore and consider - This link will open in a new window..

If you have questions, your advisor can walk you through the renewal process and explain your options. If you’ve been affected by the pandemic, your advisor can help you find the right solution for your financial situation.

Will your mortgage be up for renewal soon? Renew online through AccèsD—it’s easy! You can renew penalty-free up to 120 days before your mortgage term ends.

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