Worried About Higher Rates at Mortgage Renewal?

By Shahar Rotberg*

Is your mortgage is up for renewal in 1-2 years? Are you worried that interest rates would be much higher at renewal?

Here is an idea for you to consider: refinance your mortgage now when rates are still more manageable. Lock it to a fixed rate, and in 5 years rates may come down. If rates decline in the next 5 years, you can always refinance again and enjoy the lower rates. But refinancing now protects you for the next 5 years from having to face much higher rates in the more immediate future.

What are the downsides of this approach?

1. you will have to pay a prepayment penalty (usually 3 months’ interest or 3 months’ interest rate differential).
2. you will likely have to pay more than you would have in your last 1-2 years under your current mortgage.
3. if rates go down and you want to switch to a better rate, you again have to pay another prepayment penalty to refinance at the lower rate.

What are the benefits?

1. you will not have to worry about what rates will be in 1-2 years when you renew. There is a non-negligible chance that those rate would be much higher than now.
2. you will not risk having to sell your house (when prices are down) if you cannot afford your mortgage at the higher rates when your renewal time comes.
3. you might sleep better at night.

You may want to speak to your bank now, or talk to a mortgage broker to see what rates are available now. If you are afraid you won’t be able to bear many more increases in rates, you may want to consider this step now.

*The opinions expressed herein do not represent the views of CMHC.