Navigating Mortgage Renewals: Expert Strategies for Financially Stretched Canadian Homeowners

by Editor

TORONTO – As increasing numbers of homeowners encounter mortgage renewals at unexpectedly higher interest rates, some are confronted with the daunting prospect of selling a home they can no longer afford. However, experts suggest that before putting up a “For Sale” sign, financially strained homeowners should explore alternative steps to alleviate their situation.

“We must acknowledge upfront that selling the house may ultimately be the only option for some homeowners,” says Becky Western-Macfadyen, a financial coaching manager with Credit Canada.

Nevertheless, homeowners should initiate the process by reevaluating their family’s finances. This entails scrutinizing both incoming and outgoing funds, including frequent expenses such as household maintenance, car repairs, and medical bills.

The subsequent step involves brainstorming potential solutions on paper to diversify income sources. This may entail taking on a second job, requesting a raise at work, or considering renting a room within the house, according to Western-Macfadyen. In dire situations, she cautions that significant measures might be necessary to reduce spending, emphasizing the need for substantial and sustainable changes rather than simply cutting minor expenses like daily lattes.

Furthermore, Western-Macfadyen suggests that homeowners allocate any available surplus funds toward their current mortgage as a lump-sum payment before it’s renewed at a higher rate, which can help manage the anticipated increase in monthly payments.

Homeowners can also seek guidance from a financial adviser or certified financial planner to determine what an affordable yet sustainable lifestyle looks like, according to Tony Salgado, founder of AMS Wealth.

As the mortgage renewal date approaches, it’s crucial not to assume that the initial offer from a lender is the best rate available. Salgado recommends working with a mortgage broker and shopping around, as even a one or half-percent reduction in interest can be valuable in the current financial climate.

Factors such as mortgage amortization, choosing between fixed and variable rates, and identifying the best rate offer can also assist in mitigating the impact of higher rates upon renewal.

Presently, mortgage rates with traditional banks exceed five percent, and rates with alternative lenders can be even higher. This is in contrast to the mortgage rates of less than three percent during the pandemic when the Bank of Canada’s benchmark rate was exceptionally low.

Salgado dispels the notion that the surge in mortgage rates only affects low- or middle-income households, emphasizing that anyone with a mortgage is impacted. High-income individuals may have more flexibility in adjusting to higher borrowing costs by reallocating assets, capital, or retirement savings.

However, some younger homeowners are turning to their parents for help in meeting rising mortgage payments, often as an advance on their expected inheritance.

But if all these options have been exhausted, it may be time to consider other alternatives. Mortgage payments are typically the last financial commitment homeowners are willing to relinquish, often after maxing out credit cards and lines of credit.

In such cases, it’s essential to take action, which may include selling the property, foreclosure, or surrendering the home. Western-Macfadyen recommends considering a sale instead of foreclosure to avoid selling the property below market value and incurring additional costs.

As higher interest rates impact housing market activity, homeowners may struggle to achieve the expected sale price. Consultation with a licensed insolvency trustee could help manage the process of selling the house and handling debts.

However, selling the property doesn’t absolve homeowners of all responsibilities. They must continue to cover remaining utility expenses and house insurance until ownership is transferred. Should the house sell at a loss, homeowners are responsible for covering the difference, which might involve tapping into other investments or exploring options like a consumer proposal or bankruptcy.

Once the house is sold, homeowners are left with the question, “What’s next?” Western-Macfadyen notes that individuals who sell their homes will face a challenging housing market characterized by higher interest rates, soaring rental prices, and an overall affordability crisis. She warns against expecting rates to fall again anytime soon, stating that those renewing their mortgages in the next year or two will undoubtedly feel the financial strain

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