Ideas to Minimize or Manage Higher Mortgage Payments

Paying more for your mortgage? 

I know it's not easy after enjoying such low interest rates for such a long time, but there may be some ways to manage it.

If you're in an Adjustable Rate Mortgage (also sometimes called a Variable Rate Mortgage with a non-static payment), you have likely noticed that your payments have started to rise with the Bank of Canada rate increases/increases to Prime Rate.

First, before you panic about rates rising and whether you will be able to make your payments, try to remember that, for the past 2-4 years, all mortgage borrowers have had to qualify for their mortgages based on the mandatory Government "stress test". This means that, despite some of the record low interest rates that we have actually been paying over the past few years, borrowers have been forced to show that they will be able to make the payments if rates were to rise as high as 4.89-5.25%, using approximately 40-44% of their income to pay for mortgage and non-mortgage debt. If you got a mortgage in the last 4 years, then you passed this test. Granted, I know this calculation does not include a number of factors such as daycare costs (for some of you), gas prices, and the overall increase to the cost of living lately, but hopefully it's a tiny bit comforting to know that *on paper* you should hypothetically be able to make the payments based on 40% of your pretax income, leaving 60% of your income for those other expenses and taxes.

If that's not comforting (I tried!), here are a few ideas to help you minimize/manage your mortgage payments:
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• Switch from Accelerated Biweekly or Accelerated Weekly payments to Monthly payments.
  If you have chosen Accelerated Biweekly payments or Accelerated Weekly payments, this forces you to make extra payments every month to reduce interest costs. This is great in times when you are able to make extra payments, but not ideal in times when cash flow is tight.
  If you are looking to lower your monthly mortgage payments, I would recommend changing back to monthly payments as soon as possible, as this will immediately free up some of your monthly cash flow.
  If you're confused about how this works, here is a quick summary:
  There are 26 Biweekly payments in a year (ie. payments every two weeks). When you choose Accelerated Biweekly payments, lenders will take your monthly payment and divide it in half to arrive at your Accelerated Biweekly payment amount. This is different than "Regular Biweekly" payments, which would take your annual mortgage payments and divide it by 26.
  For example, let's say that your monthly mortgage payments when you first started your mortgage were supposed to be $2,000 per month. This means that your total payments per year would be $24,000.
  With regular Biweekly payments, the payments would be calculated like this: $24,000 divided by 26 = $923.08 payments every two weeks
  With Accelerated Biweekly, you would take the monthly payment and divide it in half: $2,000/2 = $1,000 payments every two weeks
  Thus, with Accelerated Biweekly payments, you end up paying $1,000 x 26, which is equal to $26,000...or $2,166.67 per month.
  In this scenario, by switching back to monthly payments, you can lower your payments by $166.67 per month.
  Once times are easier and your cash flow has increased, you can switch back to Accelerated Biweekly payments and pay down your mortgage quicker again.
  Note: Please keep in mind that some lenders call their Accelerated Biweekly payments just "Biweekly", so you may be on an accelerated payment plan without even knowing it. If you're unsure which type of Biweekly payment plan you are on, it's best to check with your Lender or your Broker.
  
  
• Check to see if you have a Home Equity Line of Credit (HELOC) available with your mortgage.
  If money is tight right now, you could always use that HELOC to help with your mortgage payments. In essence, this is using your own equity to help balance out the extra interest. Remember that your home is still appreciating/gaining value, so hopefully this makes you feel better about using your equity. Just remember that anything you withdraw from the HELOC will require interest-only payments, which are usually charged at Prime + 0.50% (currently, this would be 4.2%). However, you can always withdraw funds from the HELOC into your bank account, then transfer back into the HELOC, as a payment. You could do this as a temporary solution until interest rates start to come back down again.
  If you do not have a Home Equity Line of Credit, check with your lender if they offer it. If they do not offer HELOCs, you can always put the extra payments onto an unsecured Line of Credit (LOC) for the time being. Again, some people may not like this option as it feels like you are gaining debt; however, please keep in mind that this is a temporary solution and that your home value is likely rising at a similar pace. Once rates begin to level out, we can look at refinancing your mortgage to consolidate your mortgage balance and HELOC/LOC balance into one payment. For those of you with variable or adjustable rate mortgages, this will be easier for us to do, as it will be just 3 months of interest as your penalty. If you are in a fixed rate mortgage, this may be a bit harder to do, if your penalty to break your mortgage is high at the time.
  
  
• Consider refinancing your mortgage to lower monthly payments.
  There may be an option to refinance your mortgage to increase your amortization, which may lower your monthly payments. When you refinance and increase your amortization, this will trigger a prepayment penalty and may also require you to pay new legal fees, so these costs will have to be weighed before you can determine if this option makes sense. There may be an option to include the penalty and legal fees into your new mortgage amount. Please keep in mind that, based on today's Variable Rate discounts (the percentage that is subtracted from Prime Rate) vs the Variable Rate discounts in the past, the new rate may be higher than your current mortgage rate. However, if cash flow is truly the most important factor for you, this may be an option you may wish to discuss with your Mortgage Broker.
  
  
• Consider switching your type of mortgage.
  If you are in an Adjustable Rate Mortgage, are worried about Prime Rate continuing to rise, but do not wish to lock into a Fixed Rate mortgage, you may wish to consider refinancing your mortgage and moving to a lender with a static Variable Rate payment. With a Variable Rate static-payment mortgage, your payment will not move even if Prime Rate increases, *unless* Prime Rate rises so high that you hit your "trigger point" (where your payment is no longer enough to cover the interest payments).  Please keep in mind that, based on today's Variable Rate discounts vs the Variable Rate discounts in the past, the new rate may be a higher interest rate than your current interest rate. If paying less interest is your goal, then you may want to keep your great Adjustable Rate and pay a higher payment for now. However, if cash flow is truly the most important factor for you, switching to a static payment may be an option you may wish to discuss with your Mortgage Broker.
  
  

If you are truly struggling with payments, the best option would be to reach out to your Mortgage Broker or Lender as soon as possible to discuss your options. Each individual situation is different, and options will range based on your specific financial picture.

Just one more note: if you're in a Variable Rate Mortgage (with a static payment), your payment may not have risen automatically. However, if paying off your mortgage is your goal, you may want to think about increasing your payment (if you are able to), since more of your mortgage payment is now going towards interest instead of paying your principal balance.

Questions? Please feel free to reach out! I am happy to help.

Hang in there! We won't be in this space, or in this place, forever.