What To Do If You Can’t Afford Your Mortgage Renewal Payments

What To Do If You Can’t Afford Your Mortgage Renewal Payments

For many homeowners, the mortgage renewal process is becoming increasingly daunting given current economic conditions. According to CMHC, approximately 1.2 million Canadians with fixed-rate mortgages will be facing a mortgage renewal in 2025. Despite recent rate drops, most of these mortgage holders will be renewing at higher interest rates – making payments less affordable. Mortgage delinquency rates are already on the rise and are projected to increase further according to CMHC projections.

If you’re facing a mortgage renewal with payments you can’t afford, you have options. Understanding these options and creating a plan before your renewal date can help you manage higher payments and keep your home.

Assess Your Current Financial Situation

Before exploring solutions, evaluate your current financial position to understand what you can realistically afford and what options might be available to you.

What Are Your Budget Constraints?

Review your monthly income and expenses, including all debt payments. Create a detailed list of your spending to identify areas where you might find additional funds to allocate to increased mortgage payments.

What Is Your Debt-to-Income Ratio?

Calculate your total housing costs, including monthly mortgage payments, property taxes, heating, and condo fees. According to RBC guidelines, these costs should not exceed 32% of your gross annual income. In most cases, a traditional first mortgage lender (like a bank) does not “re-qualify” you when you renew your mortgage.  If your mortgage payments are up to date, renewal is usually automatic.  However, if your housing costs exceed this threshold, it may be more difficult for you to avoid your new mortgage payments. You may need to explore some of the options mentioned below like extending your amortization period..

How Much Home Equity Do You Have?

Calculate your home equity by subtracting your outstanding mortgage balance from your home’s current market value. This figure is crucial as it determines:

  • Whether keeping your home makes financial sense
  • What refinancing options might be available
  • Whether you qualify for debt consolidation using home equity
  • Your negotiating power with lenders

What Increase Are You Facing?

Research current market rates and use online mortgage payment calculators to estimate your new payment amount. Understanding the potential increase helps you:

  • Plan your budget accordingly
  • Determine how aggressive your solution needs to be
  • Decide whether to lock in early or change from fixed to variable

What is Your Risk of Foreclosure Risk?

If your new payment will exceed 40% of your take-home pay or you’ve missed payments in the past year, you may be at risk of default. Most lenders begin foreclosure after 4 missed payments but prefer to work with you to bring payments current. Some may consider options like a Sale by Borrower plan – giving you 90 days to sell your home while still living there.

Signs You Need Professional Help

Watch for these indicators that you may need to talk with a professional about debt management options:

  • Consistent missed or late payments on current debts
  • Regular use of credit cards to cover basic expenses
  • You are falling behind on current mortgage payments
  • Recent income reduction affecting your ability to make payments
  • Multiple high-interest debts consuming your monthly income

Debt making mortgage payments difficult?

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Strategies to Lower Your Mortgage Costs at Renewal

Contact Your Current Lender

Don’t accept your lender’s auto-renewal rate without discussion. These rates are typically higher than what you can negotiate, assuming your mortgage is in good standing. Schedule a meeting with your lender to discuss your mortgage renewal including options for a lower interest rate. Many financial institutions prefer to keep existing clients and may offer competitive rates to prevent you from deciding to switch lenders.

Extend Your Amortization Period

Lengthening your amortization period spreads your mortgage loan over a longer term, reducing your monthly payment amount. While this means paying more interest over time, it can provide immediate payment relief when needed. You may qualify for a 30 year mortgage term if you’ve built up at least 20% equity in your home.

Compare Fixed Versus Variable Rates

Take a good look at market rates to see which are lower, fixed or variable interest rates and consider where rates are trending. Carefully evaluate whether a fixed or variable rate better suits your situation. Fixed rates provide payment stability, while variable-rate mortgages are subject to market change. Consider your risk tolerance and financial ability to handle potential rate changes.

Consider Interest-Only Payments

Some lenders offer temporary interest-only payment periods to help manage affordability challenges. During this time, you’ll only pay the interest portion of your mortgage, reducing your monthly payments. Remember that your principal balance won’t decrease during this period, and you’ll need to resume regular payments eventually.

Use Skip-a-Payment Options

Many mortgages include skip-a-payment features that allow you to occasionally skip monthly payments. While this provides temporary relief, interest continues to accrue, and the skipped amount is added to your mortgage balance. Use this option strategically and understand its long-term impact on your mortgage.

Request an Extended Deferral Period

An extended deferral period allows you to temporarily suspend or reduce monthly mortgage payments. Your lender may offer this option if you’re experiencing financial hardship. Missed payments are added to your mortgage, increasing your overall debt. Consider this a short-term solution while you address underlying financial issues.

Explore Refinancing With a New Lender

Shop around during renewal time to find better rates with different lenders. While switching mortgage lenders involves more paperwork and possible fees, potential savings could outweigh these costs. Remember that refinancing is the same as getting a new mortgage and as such requires meeting current mortgage qualification standards, including passing the mortgage stress test and credit score review.

Take Advantage of Early Renewal

Many lenders offer early renewal options, sometimes up to 120 days before your term ends. This can help you lock in a favorable rate before your renewal date. Use this time to compare rates and negotiate with multiple lenders. Talk with a mortgage broker about competitive options.

Consider a Home Equity Line of Credit

If you have sufficient home equity, a HELOC can provide flexibility in managing your mortgage payments and other debts. Interest rates will be higher than your current mortgage but lower than other credit products. The revolving nature of a HELOC can allow you to access your home equity during periods of financial difficulty, then pay down any borrowings when your situation improves. However, careful management is essential to avoid increasing your overall debt load.

Consolidate Other Debts

High-interest debts can make mortgage payments unmanageable. Consider consolidating unsecured debts through a lower-interest loan or line of credit. This can improve monthly cash flow and make mortgage payments more affordable.

Reduce Non-Essential Expenses

Review your budget for potential savings. Cancel unnecessary subscriptions, reduce entertainment costs, and look for ways to minimize daily expenses. Consider temporary lifestyle adjustments to help manage higher mortgage payments.

Sell Non-Essential Assets

Selling valuable items or investments can provide funds to reduce your mortgage principal using prepayment terms available in most mortgages. A lower principal amount means lower monthly payments and potentially better renewal terms.

Consider Downsizing Your Home

If other options aren’t sufficient, selling your home and moving to a more affordable property might be necessary. If you are taking on high-interest debt to pay your mortgage, downsizing is a better option than continue to build negative personal wealth.

Selling An Investment Property

For real estate investors, the decision to sell becomes particularly critical when properties generate negative cash flow. Covering monthly shortfalls with additional debt or personal income erodes your equity position and can lead to significant financial strain. While selling an investment property in a soft market may be difficult, continuing to carry negative cash flow properties can be more damaging to your long-term financial health. Consider selling underperforming properties before renewal to protect your remaining equity and financial stability.

Explore a Consumer Proposal

If you have significant unsecured debt including credit cards, payday loans or tax debts, a consumer proposal can help manage these debts while keeping your mortgage. This legal process allows you to settle unsecured debts for less than you owe, freeing up money for mortgage payments. Unlike bankruptcy, you can keep your home as long as you maintain mortgage payments. To qualify you must be insolvent which means you owe more than you own. If your other debts exceed your home equity, net of selling costs, this can be a good option.

If you are dealing with high-interest debt, and this is limiting your ability to keep up with higher mortgage rates, contact a Licensed Insolvency Trustee at Hoyes Michalos for a free consultation to review your options and develop a plan that works for your situation.

Similar Posts:

  1. What to Do If Your Mortgage Renewal is Denied in Canada
  2. Can’t Pay Your Mortgage? Options To Keep Your House
  3. Second Mortgage Home Equity Loan or Interest-Free Consumer Proposal?
  4. Will A Second Mortgage Clean Up All Your Debts?
  5. Does a Consumer Proposal Affect my House and Mortgage?

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