Michael Lawrence, CFP®, CIM® and Michael Callahan, CFP®, CIM®
Renewing your mortgage is an important event with many considerations. Most mortgages issued in Canada have a term of five years and are amortized over 25 years. This means you will likely renew your mortgage at least four times before it is paid off. With the right advice from your trusted Edward Jones financial advisor, you can potentially shave years off the life of your mortgage and save thousands of dollars along the way.
1. What does it mean to renew my mortgage?
Renewing your mortgage means paying off your existing mortgage, which has ended, with a new mortgage. It usually involves renegotiating the terms of your mortgage contract, or accepting the “new terms” that your existing lender provides.
At renewal you can:
- Make lump sum payments on your existing balance without penalty
- Select the term that works best for you
- Choose between a fixed or variable rate
- Change the payment frequency
- Switch to a different lender
- Refinance (borrow against the equity in your home)
2. How is my mortgage payment determined?
Your mortgage payment is made up primarily of 4 factors:
- Amount owing
The more you borrow, the higher your required payment will be. - Interest rate
A higher interest rate will lead to more interest being paid on the mortgage loan. - Payment frequency
Paying your mortgage more frequently will reduce the amount you owe in the long term. - Amortization period
Longer amortization results in lower payments but will increase the total amount of interest paid over the lifetime of your mortgage.
3. How can I decrease my mortgage payment?
If you feel like you can no longer afford your mortgage payment, speak to your Edward Jones financial advisor and have them complete a cash flow review.
To decrease your mortgage payment, you can try any combination of:
- Make a lump sum payment to decrease the overall amount owing on your mortgage.
- Secure a lower interest rate at mortgage renewal. This could be done by selecting a variable rate when rates are expected to decrease over your mortgage term or locking into a fixed rate that is lower then your current mortgage interest rate.
- Increase your payment frequency. Paying your mortgage more frequently will reduce the amount you pay at each interval and decrease the amount of interest you pay over the life of the mortgage.
- Extend your amortization to reduce your mortgage payment; however this will mean you pay more interest in the long run.
Refinance: This works if you have equity in your home however there are drawbacks including additional costs in the form of fees and additional interest owed over the lifetime of the mortgage.
4. Should I go with a fixed or variable rate mortgage?
Like many personal financial decisions, it depends on you and your unique personal circ*mstances. While there is no one-size-fits-all answer, there are a few items to consider when making this decision.
Variable rates are usually lower than fixed rates, have lower prepayment penalties and restrictions, and have proven to be less expensive over time. However, variable rates are less stable, and your interest rate and corresponding mortgage payment could increase during the term. On the other hand, a fixed rate mortgage provides stability with a locked-in mortgage rate and payment, thereby easing any potential anxiety around budgeting and cash flow. Yet, fixed rates are typically higher than variable rates, and have higher prepayment penalties compared to variable rate mortgages.
5. How much interest will I pay?
The amount of interest paid on a mortgage depends on several factors including the amount borrowed, the interest rate, and the number of years it takes to pay off the mortgage (amortization). Consider, for example, a house purchased for $716,000 (currently the average house price in Canada) with a $36,000 down payment, and a 25 year mortgage with a 6.45% interest rate.
- Mortgage (amount borrowed): $680,000
- Time to repay (amortization): 25 years
- Interest rate: 6.45%
In this scenario, the mortgage payment would be $4,534.22 per month. Over the span of 25 years, the total amount of interest paid is $680,259 Notice that the amount of interest is more than the original amount borrowed. At the end of 25 years, although the total amount borrowed was only $680,000, the total amount repaid is $1,360,259
6. Does it make sense to sell my investments to pay down my mortgage?
Maybe. Depending on your individual goals and your comfort level with risk. To determine if this makes sense financially, speak with your advisor about the type of investments you own, the rate of return you are expected to earn, the tax treatment of those investment returns, and the rate of interest on your mortgage.
Aside from the math, there may be other personal factors to consider as well. For example, some people are comfortable carrying significant amounts of debt, while others are naturally more debt-averse and sleep easier at night when they aren’t burdened with significant debts. Furthermore, this doesn’t have to be an ‘all or nothing’ type decision – it may make sense to use some, but not all, of your investments to pay down your mortgage. Before making this decision, pay attention to pre-payment penalties as many mortgages have fees or penalties for early payments, so be careful to check the terms of your agreement first.
Many products with guarantees and principal protection, such as GICs, typically offer low rates of return and poor tax efficiency. If you’re carrying a high rate of interest on your mortgage, it may make sense to use the proceeds from a GIC to pay down a portion of that debt. On the other hand, some investments can provide higher rates of return over time, as well as increased tax efficiency. If you’re enjoying a low rate of interest on your mortgage and earning a higher rate of return on your investments, it may be more beneficial to leave your investments intact and make your regular mortgage payments from other sources.
7. Does extending my amortization require me to pass the stress test again?
It depends. If you remain with the existing lender, this is likely not required. However, if you decide to switch lenders (say to secure a lower rate or more favourable terms), you may be required to pass the mortgage stress test again.
Keep in mind that the Canada Mortgage and Housing Corporation (CMHC) will only insure mortgages with an amortization period of 25 years or less, so to extend the amortization beyond 25 years, you will need to have at least 20% equity in your home.
Additionally, there may be fees charged by the lender to facilitate an extension of the amortization period.
8. Does the mortgage stress test apply to all lenders?
No, the mortgage stress test only applies to federally regulated lenders such as Banks, Trust Companies and Life Insurance Companies. Credit Unions and other private lenders that are not federally regulated do not need to use this mortgage stress test for qualification. That said, they can still use it when determining a person ability to repay the loan.
9. The bank offered me life insurance linked to my mortgage - Should I get it?
There are a few important differences between life insurance purchased as an individual versus through a lender. An individual policy is usually far superior to a lender-owned policy. Here is a summary of some key differences:
Individual Insurance Policy | Bank-Owned Insurance Policy | |
|---|---|---|
| Policy Owner | You | Lender |
| Death Benefit Type | Remains constant during the lifetime of the policy* | Decreases with every mortgage payment |
| Amount of Coverage | Your choice – the amount of life insurance can be chosen to meet your needs | No choice – Coverage matches mortgage amount owing at death and decreases as the mortgage is paid, although your premiums do not decrease accordingly |
| Term | Your choice – typically 5-, 10- or 20-year terms are available, often with the option of converting to permanent insurance | No choice – your coverage is cancelled when the mortgage is paid or moved to another lending institution |
| Beneficiary | Your choice – You can name anyone you wish to receive the insurance proceeds | No choice – The lender is the beneficiary and will receive the insurance proceeds |
| How the insurance proceeds are used in the event of death | Your choice – Life insurance proceeds are paid as tax-free cash, and your beneficiary can spend, save, or invest the money any way they choose | No choice – Insurance proceeds are paid directly to the lender |
| Other uses for your policy | Your choice – You can use the same policy to cover your general life insurance needs as well, such as paying off outstanding debts or funding your childrens' education | No choice – Only the current mortgage amount is covered |
| Premium payments | Your choice – Most insurance companies offer monthly, quarterly, or annual payment schedules | No choice – Insurance premiums are added to your mortgage payment |
| Premium discounts | Premium is affected by gender, age, and smoking status | Premiums are usually the same for all clients of same age |
| Portability | Yes – Your insurance is not linked to the mortgage and stays with you regardless of where you live, work, or where you obtain or renew your mortgage | No – Your insurance can be cancelled if you renew your mortgage with a new lender, or even if you refinance at the same institution |
| Professional advice | Yes – Personalized service from a licensed life insurance advisor to address your financial security needs | No - Advice is typically limited to the mortgage insurance product only |
| Regulated sales | Yes – Only licensed life insurance agents can sell individual life insurance policies | No – Retail bank staff and mortgage representatives are not required to meet life insurance licensing or education requirements |
*Increasing and decreasing death benefit amounts are available from some insurers Insurance and annuities are offered by Edward Jones Insurance Agency (except in Québec). In Québec, insurance and annuities are offered by Edward Jones Insurance Agency (Québec) Inc.
10. Does the Bank of Canada (BoC) decision to raise or lower their policy rate impact my mortgage payment?
It might. If you have a variable rate mortgage and your payments are adjusted with rate changes, the Bank of Canada’s policy rate decisions will have an impact on the amount you owe each time.
If you have a variable rate mortgage and fixed payments, you will likely not be immediately impacted by the BoC rate decision unless it causes you to exceed your trigger rate. In a period where the BoC is raising rates, with fixed payments on a variable mortgage, you will pay less towards the principal of the mortgage and more towards interest. This will cause your amortization period of your mortgage to increase, and you will end up paying more interest over the mortgage term. The opposite is true in periods where the BoC is decreasing the policy rate. If you have a variable rate mortgage and variable payments, your mortgage payment will decline as it will be adjusted downward to reflect less interest owing and to keep true to the agreed upon amortization period. In a period where the BoC is decreasing rates, with fixed payments on a variable mortgage, you will pay more towards the principal of the mortgage and less towards interest. This will cause your amortization period of your mortgage to decrease, and you will end up paying less interest over the mortgage term.
Common Mortgage Renewal Terms and Explanations
We can help
At Edward Jones, we can help you achieve your financial goals and that depends entirely on your unique situation. Contact your local Edward Jones advisor to discuss how the choices you make could impact your financial strategy.
