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My Mortgage Renewal Strategy

Our mortgage comes up for renewal on September 1st. When we bought our home in 2011 I went with a five-year discounted variable rate mortgage at prime minus 0.80 percent. Such a steep discount wasn’t available when it was time to renew in 2016, so I chose a 2-year fixed rate mortgage at 2.19 percent. So, what to with our mortgage renewal now that interest rates have ticked higher?

We’re not alone with this mortgage decision. A CIBC report estimates that nearly half of all existing mortgages in Canada will need to be refinanced in 2018. Adding weight to this decision is a new stress test for both insured and uninsured mortgages where homeowners must prove they can handle payments at the greater of the Bank of Canada’s five-year benchmark rate (currently 5.14 percent) or their contractual mortgage rate plus two percentage points.

Borrowers who renew with their existing lender are not subject to the stress test, which could come as a relief to some homeowners who might have overextended their finances to get into the housing market when rates were lower. On the other hand, if your bank knows that you’re unlikely to shop around at renewal then they’ll have less incentive to offer you a good deal on your mortgage.

My Mortgage Renewal Strategy

Mortgage Renewal Strategy

I’m not worried about passing the stress test because our finances are in good shape. More important is to keep my options open so I can negotiate the best deal.

My mortgage renewal strategy is simple: I’ll take the cheaper of the five-year variable rate or the 1-or-2 year fixed mortgage rate. This strategy is based on what is now decades-old research by York finance professor Moshe Milevsky, whose ground-breaking 2001 study on mortgage rates showed Canadian mortgage holders would have been better off with a variable rate nearly nine times out of 10, saving around $22,000 in interest payments over a 15-year mortgage life.

The study looked at mortgage rates between 1950 and 2000, which critics fairly point out was during a time of falling interest rates. Milevsky updated the study in 2008 and the probability of coming out ahead with a variable rate increased to just over 90 percent, although the amount saved dropped to $20,630.

Fast forward 10 years and the mortgage landscape has changed significantly. Borrowers have more choice today. Rather than blindly accepting a lender’s “posted rate” when it’s time to renew, the proliferation of mortgage brokers and online rate comparison sites have made it easier for borrowers to find and negotiate the best mortgage rates.

There’s also less of a spread between fixed and variable rates, making it less obvious or likely that a borrower would come out ahead by choosing a variable rate.

Finally, we’re now in a period of rising interest rates. During the mortgage wars of the past five years you could easily find a five-year fixed rate mortgage under 3 percent. Today the best offer from the big banks is at 3.29 percent. Meanwhile the Bank of Canada has increased its key interest rate three times since last summer, sending variable rates up by 0.75 percent.

Don’t try to predict interest rates

My mortgage renewal strategy ignores interest rate forecasts and focuses instead on the information at hand today. No one can predict where interest rates are headed, just like no one can predict the direction of the stock market. It’s foolish to even try.

Economists and market experts predicted that rates would go up for years before the Bank of Canada actually lowered rates twice to deal with crashing oil prices. Then, when it was expected rates would stay at historic lows indefinitely, we’ve seen three rate hikes in less than a year.

Whatever you do, Milevsky said, never base your decision of whether to go fixed or variable on where you think interest rates are headed.

“You’re not a bond trader,” he said. And, in any case, economists and financial analysts often get it wrong, too.

In fact, even central banks “don’t really know what’s going to happen.”

All you can do is make the best decision you can with the information you have in front of you. Scour the market for the best fixed and variable rates. Understand your personal financial situation and know how a change in interest rate, term, or amortization might impact your finances. Stress test your own finances to ensure you can handle payments if rates rise 1 or 2 percentage points, or if you lost your job temporarily.

Final thoughts

If you’re like me and your mortgage is up for renewal this year you might be feeling anxious or frustrated to have to renew at a higher rate. Take comfort, though, that we’re still in a time of historically low interest rates. There’s also still fierce competition for your mortgage business if you take the time to shop around.

Milevsky says there’s still a place for variable rates:

Because variable rates have been the better deal historically, “I would say go with a floating rate, unless you would be disproportionately affected in a recession,” 

I agree, which is why I’ll be keeping an eye on the deeply discounted variable rate mortgages to see if I can get something under 2.50 percent when it comes time to renew my mortgage in a few months.

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19 Comments

  1. Larry B on April 23, 2018 at 4:45 am

    No mention about the B20 stress test that a borrower would need to pass if changing lenders.Your mortgage lender now has you fiscally trapped in most cases. Also no explanation about how a collateral mortgage has large closing costs if you move lenders and is another lenders trap. Collectively they are why most borrowers have little leverage come renewal time.

    • Larry B on April 23, 2018 at 6:27 am

      Oops, you mentioned the stress test, my apologies. Side note, we bought a house in Jan 1987 and took a fixed 10 year mortgage at 11%. Interest rates spiked to 21% soon after and many neighbours lost their homes. Luckiest and best decision we have ever made.

      • gcai on April 23, 2018 at 12:38 pm

        Larry B, I believe you’re mistaken as to when the interest rate spike was in the 80s – google search finds BOC prime peak happened Aug 1981 at 21%. Highest point after that (to present) was in late 1990 at 15%.

        I actually held a variable rate mortgage shortly after the peak in 1981 mainly because it allowed unlimited prepayment of principal- any amount of $100 or greater at any time.
        That made investing decisions lead pipe simple – pay down the mortgage for a risk free return in high double digits and I had the cash flow to cover – actually killed the mortgage in 3 years.
        Committing to a fixed rate in the double digits struck me as poor choice.

        • Larry B on April 23, 2018 at 2:49 pm

          Yep, just checked and interest rates only peaked around 14% (BOC rate) in Jun 1990. We paid the mortgage off in 5 years but many neighbours lost their houses even with that level of interest rates. People have far less flexibility in negotiating better terms, the banks have people by the “short and curlies”. Since the future is not bright for a return of low interest rates, it would be a tough decision to make.

  2. Bernz JP on April 23, 2018 at 8:52 am

    Are you considering another 5-year variable rate loan? I’m in the U.S and currently looking to refinance my mortgage. I’m thinking five year ARM although my wife says we should go for 15-year fixed.

    • Echo on April 23, 2018 at 9:19 pm

      Hi Bernz JP – Yes, I’m considering another five-year variable rate mortgage. I can’t say I know little about the U.S. mortgage market though, so please don’t take that as a recommendation for your situation.

    • Leigh on April 24, 2018 at 3:26 pm

      Bernz, I am in the US and made this decision recently. I had a 5/1 ARM with a 30 year amortization and it adjusted recently. It adjusted above the current 30 year mortgage rates, which was pretty crappy considering that we had about 12 years left thanks to large extra payments over the years, so we refinanced. We considered a 10 or 15 year fixed rate. We decided that we wanted a 10 year amortization since 15 years would increase the time left on the mortgage. My spouse loved the idea of a 10 year fixed rate – he wished I had taken a 15 year fixed rate when I bought the place six years ago. But then, the payment was higher than I was willing to put in my monthly budget with my then-salary. If you can fit the 15 year fixed payment into your monthly budget, I would do it. You need both spouses on board to do an ARM. You both need to be fully willing to deal with the interest rate hike that could come with the ARM. We could have paid it off with other funds, but we chose to refinance again. Now we have another 5/1 ARM, this time with a 10 year amortization. We decided it was worthwhile to save the 0.5 percentage points in interest for the next five years versus taking a 10 year fixed and the balance would be small enough then. Good luck and hope that helps!

  3. Bryan on April 23, 2018 at 11:43 am

    Great timing since I’m up for renewal in June. But I am also selling this house and moving in June 2019. So either I end up with a penalty or port my mortgage. My question to you is do you use a mortgage broker? Or websites you could recommend? Or both? I’m curious what you do to compare rates. Thanks!

    • Echo on April 23, 2018 at 9:42 pm

      Hi Bryan, I like RateSpy for mortgage trends and rate comparisons. I don’t personally use a mortgage broker as I’ve had good success with my bank. The key is to come prepared with the best comparable rates on the market and be prepared to either escalate the negotiation with a manager or walk away if they can’t meet your needs.

  4. Eng Phys on April 23, 2018 at 2:44 pm

    Can I just go onto ratehub.ca, ratespy.com, lowestrates.ca or ratesupermarket.ca and just pick the lowest 5 year variable?
    Do I have to worry about lenders who are not the “big banks”?
    Do I need to worry about the fine print?

    • Echo on April 23, 2018 at 9:55 pm

      Hi Eng Phys, I’d view the lowest rates on those sites with a healthy dose of scepticism. The reviews on Butler Mortgage, one of the lowest rate advertisers on those sites, should be enough to scare you away. Instead I’d look at the big banks and watch what kind of special rates they advertise on rate comparison sites versus their own sites.

      For example, last time my mortgage was up for renewal TD was offering 2.29 percent for its 2-year fixed rate. On RateSpy, which posts updates from readers and mortgage insiders, I saw that someone received 2.14 percent from TD after some hard negotiating. I asked for that and ended up with 2.19 percent.

      Definitely watch the fine print when it comes to prepayment privileges, pre-approvals, and other hidden details. Again, picking on Butler Mortgage, they advertise an ultra low rate but in fact your contracted rate is higher but then you get a lump sum of cash back upon closing.

  5. The Curious Frugal on April 23, 2018 at 8:34 pm

    Our mortgage is up for renewal this summer and then we have only a couple of years left on it. We’re debating between figuring out the best choice for us for renewal or seeing if we could pay it off completely this summer. Even with the rate hikes, the rates are still so low. It’s tempting to renew and keep a mortgage for another two years and keep that potential money invested instead. It would be different if the lending rates were in the double digits.

    • Echo on April 23, 2018 at 10:00 pm

      @The Curious Frugal – Congrats on almost being mortgage free! I agree, it’s tempting just to keep the loan at today’s low rates. You could always get an open mortgage – you’ll pay a bit higher interest rate but you’ll have the ability to pay it off in full any time without penalty.

  6. Alan Whitton (Big Cajun Man) on April 24, 2018 at 7:46 am

    I did not know, “Borrowers who renew with their existing lender are not subject to the stress test, which could come as a relief to some homeowners who might have overextended their finances to get into the housing market when rates were lower.” as mentioned previously what a lovely leg-hold trap your lender now has you in.

    Going to be interesting to see how this all shakes out over the next year or so.

  7. GYM on April 24, 2018 at 9:45 pm

    I had no idea that so many people’s mortgages are up for renewal this year! Mine is up and I just renewed. I actually also wrote about my mortgage renewal process (coming up tomorrow). It was a strategy but didn’t end up being much of a strategy in the end, unfortunately. I tried to negotiate on the phone but they wouldn’t budge, I think because of my low mortgage and also short-term (was looking for a 1 year fixed). I also prefer the big banks as they have more options available if needed.

    • Sarah @ Couple of Sense on April 25, 2018 at 11:46 am

      Apparently close to 47% of mortgages in Canada are up for renewal this year. Ours is too and we were talking about what out plan is. Hopefully we have less than a decade left on it. We have been spoiled with our 2.19% rate for 2 years but we have been putting extra onto the mortgage so the increase in payments won’t hurt as much but more will go to interest.

  8. GK on May 4, 2018 at 3:20 am

    Great post! Mine comes up for renewal this year too. Do you think that renewing a mortgage plus adding on a new HELOC would improve the chance of getting better rates? I’m not intending to use the HELOC but would be great to have as an emergency credit line, and if it helps save on mortgage interest, why not?

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