The year 2022 began with record-high housing prices financed with incredibly low-interest rates. But the year is closing on another increase of 50 basis points by the Bank of Canada, interest rates are hitting Canadians hard who bought at inflated prices. Even harder on those who signed up for variable mortgage rates. There’s another whole pack of people out there who are facing mortgage renewals in the near future. Five years ago, target overnight rates hovered around the 1% mark, and as we exceed 4%, it’s putting a lot of pressure on homeowner budgets.
So, what if you find yourself under the crunch? Food prices and inflation have also skyrocketed with very few incomes keeping pace. As a general rule, your mortgage should consume under 30% of your take-home income. If you’ve been going over your budget and all you can see are shortfalls maybe it's time to look at lowering your monthly mortgage payments.
While you can’t control the Bank of Canada, you do have some influence on where you get your mortgage. Putting in the time to look for the best rate can save you thousands of dollars in interest over a 5-year term or longer. Think of this. If you reduce the interest rate by 1% on a $200,000 30-year-fixed loan can equate to saving almost $120 every month! So, shop around and negotiate, if you see a lower interest rate contact your lender and lock it down. It may be worth paying a penalty over the long run.
Another option is to look at buying down your rate with points. Talk to your lender about “mortgage discount points.” This is where you prepay interest as part of your closing costs to get a lower rate. Each point is worth 1% of your loan, so if you sign up for a $200,000 loan then a single point would cost you $2,000 but could reduce your rate by .25% to .5%. This can be particularly impactful if you are planning on living in the same home for decades.
It may be time to revisit your financial goals and extend your amortization period. You’ll be paying your mortgage for longer, but if you need to alleviate immediate financial pressure this can improve your cash flow each month. No one wants to live paycheck to paycheck. The longer the mortgage term, the lower your monthly mortgage payment can be, spreading out the loan over more payments.
In most cases, you don’t even need to refinance your mortgage. Many lenders offer what they call a re-casting or re-amortizing service for a fee of about $250.
Paying down 20% of your home’s appraised value can eliminate this cost. Many people try and save this amount as their down payment but if that wasn’t possible initially, then it is time to check.
When you refinance, your lender will determine your home’s value with an appraisal. Then simply subtract what your current loan balance is from your current home value. If you have paid off 20% you can kick your mortgage insurance to the curb.
There are a few things to think about with this:
If your current interest is significantly higher than the going rate, it may do you good to look at refinancing your mortgage. By finding a lower interest rate you can lower those mortgage payments. Be sure to inquire about any penalties and calculate those costs in the big picture.
Looking at alternative types of mortgages can also be beneficial. Ask your lender about open, closed, fixed, or variable rates and see what best serves your current financial situation.
If you’ve come across some extra cash along the way, adding that during the refinancing process can also lower your payments by directly paying down your principal.
Before heading to the negotiation table take these steps to improve your credit score and put your best financial foot forward:
The government doesn’t always get things right and with markets fluctuating and neighborhoods changing maybe it’s time to appeal your property taxes. No one is ever going to knock on your door and say, “We think you’re paying too much tax!” The onus is on you to investigate.
Your property taxes are based on an assessor’s appraisal of your land and house– if they value your home too high, you’ll pay more in taxes than you should. Review your tax bill or your municipality’s website to find out the assessed value of your property. If you think you’re sitting on the high side, submit an appeal.
Come prepared with a list of recently sold comparable homes or an appraisal if you have one. Since many of us pay our property tax and mortgage together, a reduced assessment could mean lower property taxes and therefore a lower monthly mortgage payment.
Another item we often bundle with our mortgage payment is home insurance. This deserves your attention with a little time shopping around for the best rate. Call a few companies to get quotes and find out what types of things they reward. Security systems and fire alarms can prove your house is safer than most and reduce your rates. Or take a look at combining your home and auto insurance with the same company for a discount.
Reviewing your coverage can also find savings and opt for a higher deductible. Over the long run, this may save you a ton of money. A good insurance agent or broker can guide you to the best products and coverage to meet your needs.
For many, these options are never at the top of the list, but they can be a solid alternative if none of the above tactics have helped. Renting a room or part of your house can actively help lower your monthly mortgage payment by sharing the load. If you have a basement, room above the garage or extra bedroom, rent the space out to a friend or well-vetted tenant. Don’t forget to include your utilities and internet! Remember, most tenants will sign for the year so take into account this could be a short-term solution to help you get back on your feet. Just one year of rent can make a big dent.
As a last resort, take a close look at the space you need and the space you have. Could you downsize to a less expensive home and still be happy? A smaller home can mean a smaller loan and, in many cases, fewer expenses. Remember moving comes with additional costs like real estate and legal fees, land transfer taxes, and lender charges but over the long haul, this may be the best choice for you and your family.
Whether you’ve lost an income, or can’t keep up with inflation, the good news is there are a lot of ways to lower your monthly mortgage payments. Revisit and reflect on your financial goals, and the near future. What do you want out of life today, next month, and next year? It's important to look at both the short-term and long-term to find the best viable solutions. Then weigh out the pros and cons and make a decision. You don’t have to do it alone though!
Contact Mortgage Architect Bennett Capital Group today for advice on securing the lowest mortgage payments possible and we can walk you through the rest!