Mortgagor Survival Guide: How to Live with The Craziest Interest Rate in Decades

mortgagor

For many, rampant inflation and skyrocketing prices have become a real challenge leaving almost no free money for covering daily needs. Canadians are struggling to reduce their spending, and a mortgage loan results to be an additional burden. If you feel like almost being on a financial edge, below you will find some tips helpful for a mortgagor to navigate budget difficulties. 

For the first time in decades, the Bank of Canada has increased interest rates. In April the institution announced a rise by 0,5%. In June the Bank released an even more dramatic prediction for those who had taken out mortgages in 2020-2021, stating that their monthly payments could jump by 45% in 2025-2026, given the rising rates. 

With elevated levels of inflation, many households are already struggling to reduce their monthly mortgage payments. 

According to MNP Consumer Debt Index among those who plan to renew a mortgage in the next 12 months, more than a quarter of respondents consider themselves unable to make enough to cover the current bills and almost a half (46%) predict that they are 200$ or less away from not being able to meet all their financial obligations. 

If you are a mortgagor and searching for options that will reduce your monthly debt payments, here are some of them. 

Extending the amortization period of your mortgage

At the time shopping around for a mortgage one of the key elements is the length of your amortization period. The amortization period is the time you need to pay your mortgage debt in full. The longer the amortization period you have, the lower are your monthly payments. However, there are some pitfalls. With a larger mortgage amortization period, in the end, you will pay significantly more in interest. In the wake of the mortgage loans boom, that point would have made you opt for a shorter amortization period. However, in the current circumstances when interest rates rise, it may be a better option to pay less now in order to redirect some money to other needs. Just shifting from a 15-year to 30-year amortization can cut your monthly payments by more than 30 percent. 

Refinance your mortgage 

For a mortgagor, easing the conditions of the loan is always a financial relief. Refinancing a mortgage can be a good option. It is a process of breaking your current mortgage contract and replacing it with a new one, where the lender can stay the same or can change. 

Refinancing a mortgage can open ways to get a lower rate, access equity in your home, or consolidate your debts. However, an early break of a mortgage contract could impose a large prepayment penalty, therefore carefully investigate with your lender the possible consequences of this step. 

Getting a lower interest rate is a great bonus of refinancing a mortgage. Though there will be prepayment penalties, it should not stop you from refinancing. First of all, calculate all pros and cons. If all calculations are made, the difference between prepayment penalties and the payments you make in interest is significant, and the results are less than you would pay upon your current mortgage contract, try to consider opening a new one with lower rates. 

Think about HELOC 

A HELOC or home equity line of credit could be another way to increase your budget in case of an urgent need. 

HELOC is actually the loan on the part of the home you already own outright. In other words, your home equity is the value of your home minus the remaining mortgage balance. When you apply for a HELOC you are asking a lender to open a credit line on your home equity. Usually, lenders tend to make much more affordable rates for a HELOC compared to the other funding options like credit cards. 

With HELOC you are accessing a certain credit limit, which you can withdraw in a necessary amount. You can access it anytime you need an additional sum of money as long as you do not exceed the limit you are approved for. Like with credit cards, you are charged only with interest rates on the amount of money you withdraw. The amount of the HELOC will mainly depend on two factors: how much equity you have in your home and what your home is currently appraised at. In Canada, HELOCs can reach up to 80% of the value of your home. 

When does it make sense to use a HELOC? 

HELOCs tend to have lower interest rates compared to other lines of credit. That said, HELOC can be a good option if you have another high-interest credit open and have to cover it as soon as possible. Many use HELOCs to close credit card debts, which typically have comparatively high-interest rates. 

If the interest rate you have for your credit card loan is significantly higher than the one you’d obtain for a HELOC, probably it makes sense for you to consider opening a home equity line of credit and first pay in full your credit card line. In this way, you will save up a significant sum of money in interest rate payments. 

Who qualifies for a HELOC? 

Typically, the minimum amount of equity or down payment for a home line of credit is 20%. However, it can vary, depending on the type of HELOC you would like to use. Also, you should have a solid credit score to apply for a HELOC. Take note, that your credit score depends on many factors and one of the keys of them is the on-time payments of your bills. 

That said, make sure that you are already managing your monthly payments, including credit card debts, before opening a new line of credit. Though a HELOC can be considered as a good option for urgent financial support, in some cases, you may risk finding yourself in an even worse financial position, if you don’t manage to navigate your current financial responsibilities. 

Try to consolidate your debt 

A debt consolidation loan is another option for those who have multiple loans at the same time and want to find a way to spend less on their debt payments. The main trick with a loan is how to find the one with the most advantageous conditions for you. 

Mainly, it is about interest payments which constitute a significant part of your spendings added to the cost of your loan. With debt consolidation, you have a good tool to unite all your debts in one taking a new one. Using it wisely, you will be able to reduce your monthly payments by lowering interest rates on the single loan you are paying off. 

Debt consolidation means that you are borrowing a new sum of money to cover all existing loans. Instead of paying off multiple loans, you will redirect your finances in the fastest manner to cover the most expensive debts ( i.e. where you are charged with the highest interest rates). Once they are closed, you will only make payments on this new loan. Often you will be offered better conditions compared to your existing debts. 

Unfortunately, if you mismanage your finances, as in the case of HELOC,  it can cause you even more trouble with covering your loans. In the most drastic scenario, you risk ending up only increasing your debt payments and with even more loans than you had previously. 

Ask for advice 

If you feel like being stuck in financial difficulties and can’t find a way out on your own, try to use the help of professionals. A credit counselor can help you to get back on track and reduce or eliminate some of your interest rates or offer you some choices which are making the most sense in your personal financial situation.

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