Homeowners with variable-rate mortgages are under tremendous financial pressure. That tends to happen when rates rise from historic lows to 22-year highs in the span of ten months.
But here’s something you may not know: In November 2022, out of Canada’s more than 5.1 million residential mortgages, only 7,426 — a microscopic 0.15% — were in arrears, according to analysis by the Canadian Bankers Association. A mortgage is considered in arrears when the borrower misses three or more payments.
One reason for that low figure is Canada’s conservative lending guidelines. But another major factor is that when mortgages start becoming unmanageable, homeowners have options that can help them manage the strain.
Let’s explore four of these options now, starting with the least risky. If you’re feeling squeezed by your monthly mortgage payment, one of them may help you carve out some breathing room.
1. Defer your mortgage payments
If you’ve been making your payments on time, your lender may be willing to grant you a mortgage deferral. Under this arrangement, you can pause your mortgage payments for an agreed-upon period of time.
You’ll be expected to resume a regular payment schedule once the deferral period expires. You’ll also have to make up for the payments you missed by either increasing your regular payment amount, adding the deferred payments to the end of your mortgage term or extending the mortgage’s amortization.
“The pro to [a mortgage deferral] would be temporary payment relief,” Jonah Wright, a Halifax mortgage consultant with Mortgage Intelligence, said in an email. “The con would be that the interest is often added onto the loan, which increases the duration in which the loan will be repaid.”
2. Switch to a fixed-rate mortgage
With the Bank of Canada ratcheting up its overnight rate so quickly over the past year, homeowners face the unusual scenario of fixed mortgage rates actually being lower than variable rates. If your variable-rate mortgage payments are too high, switching to a fixed rate could provide some payment relief.
It’s one of the simpler solutions on offer, but you’ll have to commit to it for the duration of your loan term. If you’re a year or less into your term, for example, you’ll be locked into your new fixed rate for at least four years. If rates decrease before 2027 — and many believe they will — you’ll be stuck making payments that will again seem too high.
“If you want to lock into a fixed rate, one or two years is good,” says Dalia Barsoum, founder of GTA-based Streetwise Mortgages. “That still gives you an opportunity to reduce your payment, get some peace of mind and still benefit from that potential. improvement in the rate at [the end of the mortgage term].”
3. Refinance and reamortize
Refinancing your mortgage and extending the amortization period is a common way to decrease monthly mortgage payments. If your 25-year mortgage becomes unsustainable, a 30- or 35-year amortization may shrink your payments enough to get you through the rest of the term. Some alternative lenders are even offering 40-year amortizations, Barsoum says.
Refinancing can also help free up home equity, which can be used to pay off other debts and free up cash flow. But there are several caveats to consider when refinancing a mortgage mid-term.
First, you’ll want to try refinancing with your current lender to potentially avoid any prepayment penalties. Wright said some lenders will waive these penalties for their clients, but others may charge three months’ interest for breaking your mortgage early.
Second, refinancing means re-qualifying. If your payments are too high because your financial situation has deteriorated, refinancing could be a challenge, especially if you want to switch lenders. You’ll also have to pass a mortgage stress test based on today’s elevated interest rates.
Third, if you need a 35- or 40-year amortization, you’ll need at least 20% equity in your home. You may also have to turn to alternative lenders, whose interest rates can be considerably higher than those offered by mainstream lenders.
Finally, the payments on an extended amortization may be helpful in the short-term, but how long do you really want to be paying off your mortgage? Reamortizing means paying years of additional interest, so the goal should be to revert back to a faster payment schedule with higher payments sooner rather than later, ideally at the beginning of your next term.
4. Leverage a secured line of credit
If there’s no other way to make a mortgage payment, one strategy Barsoum uses with some of her real estate investor clients is to access the necessary amount using a secured line of credit like a HELOC. The homeowner keeps paying her mortgage, and the only short-term cost will be a modest interest-only payment on the new debt.
There’s just the little matter of eventually paying down the thousands of dollars that get added to your line of credit. If there’s no clear path to wiping out this debt, it could weigh down your finances — and your credit profile — for years.
“I wouldn’t suggest it as the first solution, but it’s better than selling the house,” Barsoum says.
Remember: Think long-term
Lenders would rather collect mortgage payments than foreclose on houses, so if you’re worried about missing a mortgage payment, call your lender or mortgage broker immediately and start working on a solution. It won’t be a particularly fun conversation, but you can’t afford to put it off.
Any changes you make to your mortgage should be made with the long-term implications in mind. Reamortizing or accessing other credit can make the next several months more manageable, but how will these short-term fixes impact your future financial goals?
When mulling over the possibilities with your mortgage advisor, don’t rule out other creative short-term options, like renting out a spare room or parking space, or becoming an Uber or Lyft driver, to ensure this year’s mortgage solution doesn’t become next year’s problem.
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