Things to consider before Renewing and switching to a fixed interest rate

If you're close to and thinking about renewing your mortgage, or you're just curious about your options, you're not alone. Renewing your mortgage is something that most Canadian homeowners will need to do at some point, and it's a big decision that can impact your finances for years to come. One option you might be considering is switching from a variable-rate mortgage to a fixed-rate mortgage. But is it the right choice for you?

What does it mean to renew a mortgage in Canada?

When you're looking to renew your mortgage in Canada, you're basically getting ready to sign up for another term with your lender once your current mortgage term comes to an end. It's like turning the page to the next chapter in your financial journey. You can either stick with your current lender or take the opportunity to shop around for a better deal that fits your current needs and circumstances.

Renewing your mortgage gives you the chance to reassess your financial goals, evaluate your current situation, and make any necessary changes to your mortgage. At this stage, you can consider changing your interest rate, mortgage term, payment frequency, mortgage type, and prepayment options to better align with your long-term financial goals. 

It's an exciting time because you can optimize your mortgage to better suit your long-term plan. Plus, you might even be able to snag a lower interest rate or negotiate better terms with your lender.

But, if you're considering switching to a fixed-rate mortgage, there are a few things you'll want to consider before making the jump.

What is a fixed-rate mortgage?

When it comes to defining a fixed-rate mortgage,  it's pretty simple: it's a type of mortgage where your interest rate stays the same for the whole length of your mortgage term, which means your monthly payments will too. Fixed-rate mortgages are usually a popular choice for people who like the peace of mind of knowing exactly what their payments will be. If you're not into surprises and like the idea of consistent payments, a fixed-rate mortgage could be a great option for you.

The benefits of switching to a fixed-rate mortgage

1. You’ll get more stability and predictability when it comes to your monthly payments 

One of the biggest benefits of a fixed-rate mortgage is stability and predictability. With a fixed-rate mortgage, you know exactly what your monthly payments will be for the entire term of your mortgage. This can make budgeting and financial planning much easier: if you pay, let’s say, $2,560 a month for the length of your mortgage term, that’s how much you’ll pay each month without any change. 

2. You’ll get protection from interest rate increases

Fixed-rate mortgages also offer protection from interest rate increases. If interest rates rise, your mortgage payment won't increase because your rate is locked in. This can give you peace of mind and protect you from potential financial stress. Additionally, if you're on a tight budget or have a fixed income, a fixed-rate mortgage can help you better manage your finances.

3. This could be an opportunity to save in the long run

Switching to a fixed-rate mortgage can also provide an opportunity to save money. If you're currently on a variable-rate mortgage, you could end up paying more in interest if rates rise. By switching to a fixed-rate mortgage, you can lock in a lower rate and potentially save money over the long-term.

Things to consider before making the switch to a fixed-rate mortgage

1. You may lock into a higher interest rate

One of the potential downsides of a fixed-rate mortgage is that the interest rate may be higher than the current variable-rate. This is because lenders charge a premium for the stability and predictability that a fixed-rate mortgage provides. At this stage, it might be beneficial to calculate how much you can save in the long run and if it’s worth the switch. It's important to weigh the benefits of a fixed-rate mortgage against the potentially higher interest rate.

2. Potential penalties if you break your mortgage early or pay off too much too fast 

Another thing to consider is that there may be larger penalties down the line if you decide to change your mortgage terms, before you're set to renew again. Depending on your current lender and the terms of your contract, the penalties may be significant. If you do need to break your mortgage earlier than the end of your term, your lender may charge you a penalty that’s calculated based on something called the interest rate differential (IRD). 

Essentially, the IRD is the difference between the interest rate you were originally locked into and the current interest rate for the remaining term of your mortgage. This difference is then multiplied by the amount you still owe on your mortgage to calculate the penalty. It's important to factor in these costs when considering whether to switch to a fixed-rate mortgage.

3. There's more limits on flexibility with a fixed-rate mortgage

Finally, it's important to consider the limited flexibility that a fixed-rate mortgage provides. Because the interest rate is fixed, you won't be able to take advantage of any potential decreases in interest rates if they happen. Additionally, you may not be able to pay off your mortgage as quickly as you would like, as there may be penalties for early repayment.

So should you switch to a fixed-rate mortgage? 

Switching to a fixed-rate mortgage when renewing your mortgage can provide stability, predictability, and potential savings. However, it's important to carefully factor in any penalties or fees associated with breaking your current mortgage contract. By doing your research and speaking with a mortgage specialist, you can determine whether a fixed-rate mortgage makes the most sense for you.

So, if you have further questions and are considering a switch, connect with a Pine mortgage agent today and they’ll be happy to help you make the best financial decision for your future and home.