In this video, we’re going to talk about
what happens to your mortgage payments
when you renew your fixed 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
When you have a fixed rate mortgage,
the higher payment could be
due to the higher interest rate you are renewing at,
compared to the interest rate you had before your renewal.
Let’s look at an example where you start with a $478,000
mortgage and a 25 year amortization.
After 5 years, your fixed rate increases from 2% to 5%.
As a result, your monthly payment would increase
from $2,024 to $2,631.
Nobody likes to see payments increase.
Fortunately, there are a few steps
you can take to lower the impact of changing rates
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.
Some clients may be eligible
to increase their amortization period
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!