With the Bank of Canada’s September announcement to pause on raising interest rates, many of my clients have their mortgage renewal date top of mind.
If you locked in at a fixed rate prior to mid-2022, then you’ve been lucky enough to keep a low rate since the rate hikes began.
However, if your mortgage renewal date is approaching in the next year or two, then it’s time to start preparing for the possibility that rates won’t come down before then.
This doesn’t mean that interest rates will continue to rise but it’s better to be prepared, especially if they don’t come back down meaningfully any time soon. There’s a low chance they’ll resemble rates during COVID.
Mortgage FOMO
The tendency in these situations is to worry about ‘overpaying’ or missing out on locking in a lower rate if interest rates drop – mortgage FOMO.
But the goal should be to manage your affairs in such a way that allows you to sleep at night. You don’t want the daily stress of worrying you’ll need to make significant lifestyle changes in the future because you were counting on rates going down.
Psychologically let’s turn the focus away from FOMO and toward decisions and strategies that avoid unnecessary pain and stress or the potential for throwing you off your long-term planning goals – the best offence is a good defence.
Now Is The Time For A Stress Test
Clients have been asking me, “Should I get a variable rate mortgage and wait for interest rates to come down or should I lock in the current rate because rates will continue to go up?”
The answer is – it depends. Here are two opposite scenario’s.
I don’t know what the interest rates will be in the future. No one does so the best plan fits your economic situation and risk tolerance.
1. If rates at the time of your renewal will push you close to the limit of what you can afford, then it might be best to lock in that rate for 3-5 years. Keeping your family safe is the priority.
Yes, you might miss out on lower rates between years 3-5 but you’ll also have peace of mind, knowing you can keep your home.
2. If you can tolerate rate hikes without undue financial stress, a variable might be a better option, as we may have already seen the bulk of the rate increases.
However, in both scenarios, it’s worth spending some time with your financial advisor and mortgage broker to discuss options.
It’s also a good idea to ensure your mortgage has flexibility where possible.
For instance, it might be a good idea to lock in a fixed rate and add a variable HELOC component. If rates drop meaningfully, you could draw from that HELOC and pay down the fixed portion, as long as the fixed portion allows for some pre-payments each year.
There are many creative solutions that you might not be aware of. This is when it’s important to work with a team of professionals that you trust.
Write Down Your Reasons
Once you’ve made your decision, take a few minutes to write down your reasons for doing this.
Why?
Because if rates do come down, you don’t want to beat yourself up about any missed savings.
It’s not about predicting the future, it’s about making the best decision you can given where you are today.
Remember, the ultimate goal is to keep your home, take care of your family, and avoid undue financial stress. Any decision you made that helped you achieve that goal was the right one.
What Else Can You Do To Prepare For The Possibility of Higher Rates For Longer
With the possibility of a recession, higher interest rates for an extended period of time, and higher than normal inflation rates, this is a good time to take stock of your finances.
If you are worried about the current rates affecting your financial situation, now is the time to consider:
- Delaying big purchases to pay for them with cash, instead of debt
- Being more thoughtful about discretionary spending
- Revisiting the adequacy of your financial safety net
- Review your non-registered investments – with interest rates going higher, it might be a good time to put money from non-registered investments towards paying down your mortgage, debts, or business loans.
- Don’t be on autopilot with investment allocation – consider more efficient ways to invest your capital.
- Ensuring you’re taking advantage of all tax deductions and credits – self-employment credits, childcare credits, etc
Based on your financial situation, maybe little to nothing needs to change but it’s always good to review your spending habits.
I think it’s also worth noting that there will always be cycles of boom and bust in the economy, and consequently your personal finances.
A prudent financial plan will account for risk, recessions, and down years in the markets, while ensuring you can maintain your current lifestyle.
If you would like to review your financial plan ahead of your mortgage renewal or have questions about your mortgage renewal, don’t hesitate to contact me.