According to the Canadian Bankers Association, in December 2020 Canadian homeowners had an average home equity of 73% of the home’s value. I suspect this statistic is largely attributed to mature homeowners who saw the value of their property increase dramatically as real estate values rose sharply over the past few years. Although markets have stabilized, and perhaps home prices slightly receded from their mid-pandemic peak, most homeowners have acquired additional equity.
At the same time, inflation has also led many Canadians to increased unsecured debt. CTV News reported that non-mortgage debt is up by 5.4% when comparing fourth quarter 2022 to the same time in 2021. As a Licensed Insolvency Trustee (“LIT”), I see a wide range of personal financial circumstances. The fortunate ones are those who have enough equity in their homes, and the ability to cashflow increased mortgage payments. They could refinance their mortgage to restructure their unsecured debt and reduce their overall interest costs.
Last year I wrote about the basic elements of mortgages in my blog Mortgage 101. One of the things I touched on was that despite an average amortization of 25 years, mortgages must be renewed at the end of their term, a shorter period in which the lender sets the rate of interest.
Interest rates having risen significantly, with the Bank of Canada’s Target Overnight Rate going from 0.5% in March 2022 to holding at 4.5% since January of this year. Anyone faced with renewing their mortgage is going to be in for a bit of sticker shock. On May 1st, one of Canada’s major chartered banks quoted a client, rates between 5.22% and 6.07% on renewal, with a higher rate for a shorter term. However, interest on a mortgage still carries one of the lowest rates of interest in consumer lending. The next best being the rate on a Home Equity Line of Credit (“HELOC”), a type of second mortgage where a homeowner can borrow up to 80% of the equity in their home, without disturbing the terms of their existing first mortgage. This contrasts with rates upwards of 20%-30% interest on unsecured credit cards.
If your mortgage is up for renewal or you want to access some of the equity in your home to either consolidate unsecured debt or use it to finance a significant expense, here are a few things to consider:
- Is your mortgage up for renewal or do you still have a bit of time left in the term? Trying to renegotiate a mortgage when the term is still current may result in both a penalty and rise in interest rate, if even possible. Consider a HELOC if you have equity and are looking to consolidate unsecured debt. Make sure you do the math as a HELOC may come with a higher rate than a conventional mortgage.
- If your mortgage is up for renewal, can you renegotiate the terms with the lender to access additional increased equity to use to consolidate higher interest unsecured debt?
- Can you meet the stress test to afford to borrow more at higher interest rates based on your income?
- If you were highly leveraged in the first place and rates have jumped, can you still afford your mortgage payments?
- What is your budget’s tolerance for rate increases? The same logic from my past blog holds true that in uncertain times a variable rate mortgage may come with surprises that you can’t afford.
- You don’t always need to stick with the same bank if the term is up. While staying with the bank will save you time on renewing as they have all your pertinent information, they are also less incentivised to be competitive on interest rates. Shopping around could shave a bit off the rate but be aware there will be closing costs as you will likely need to pay the costs associated with a lawyer discharging Bank A’s charge and replacing it with Bank B, as Bank B will be exchanging money with Bank A to make them whole on the remaining principal balance.
A mortgage broker can canvass the entire market of institutional lenders and earns a commission from the lender who places the mortgage. If you work with a broker that you trust as an advisor, it costs you nothing and they may be able to find deals that even the most credit-worthy borrowers are not aware of.
If you find that you are repeatedly refinancing your home to cover accumulated unsecured debt, have run out of equity, or are having difficulty making payments, those may be warning signs that you should speak to an LIT about how to best manage your financial situation.