Renewing Your Variable Rate Mortgage

In this video we're going to talk about what happens to your mortgage payments when you renew your variable rate mortgage during a time when interest rates are rising. And, we'll cover some of the options you have for managing those payments. First, let's talk about what happens when you renew your mortgage. Your mortgage comes up for renewal when your mortgage term ends. The term refers to how long your rate is set for. Amortization, which is another part of your mortgage, is the total length of time it takes to pay off your mortgage in full. Say you originally chose a 5 year term and 25 year amortization. When your mortgage first comes up for renewal at the end of 5 years, there would be 20 years left on the amortization. At renewal, you will choose a new term at mortgage rates available at that time. This term, along with your new rate, mortgage balance and remaining amortization are all used to calculate your new payment amount. Now, if your mortgage is coming up for renewal in a rising interest rate environment, your new mortgage payment could be higher than what you pay now. How much higher will depend on a few factors but some of the key ones include: Your current mortgage type - whether it is fixed or variable. And your new interest rate. If you have a variable rate mortgage, your interest rate may have already increased during your term. As a result, during at least some of the term, more of your payment would have been applied to cover your interest and less to paying down the principal. This means your principal balance is being paid down at a slower pace than it otherwise would have been had interest rates not changed. Consequently, your principal balance at the time of renewal will be higher than it would have been had interest rates stayed the same. Let's say your variable interest rate increased from 2% to 4% in year 4 and 5 of your mortgage, which means that more of your payment has gone to paying the interest versus paying down your principal over these years. At the time of renewal, the interest rate rises further to 5%. If you started with a $478,000 mortgage with 25 year amortization, your remaining principal after 5 years would be $17,348 higher than if the rates didn't change during the term. And, your monthly payment would increase from $2,026 to $2,758 upon renewal. Nobody likes to see payments increase. Fortunately, there are a few steps you can take to help lower your payment before it's time to renew. You can make a lump sum payment; you can Double Up your payments; or you can increase your regular mortgage payment. Any of these actions can help reduce your principal balance and help lower the impact of a higher payment at renewal.In addition to these options, there may be other ways to manage your mortgage payments, depending on your personal circumstances. increase their amortization to help lower the payment amount. We can help you take steps to manage your cash flow and your mortgage. Talk to an RBC advisor today!