How to cope with your mortgage when interest rates rise
With interest rates higher than they have been in many years, combined with inflation at its highest level in 40 years, many Islanders are trying to cope with much higher than expected mortgage payments. .
For people looking to buy now or due to renew their mortgage soon, there are many options: fixed rates, variable rates, fixed rates with variable portions and vice versa.
“With so many different options available on a mortgage, it almost becomes like options on a vehicle,” said Darryl Murphy, financial adviser at Red Oak Financial in Charlottetown.
But just as options on a car won’t improve its reliability, options on a mortgage won’t change the central problem: it’s a loan you have to pay back.
“It’s always a balance between pay now and pay later, and how much cash flow do I need now versus later,” Murphy said.
You better shop
There are different ways to spread out these payments, keeping in mind that paying over a longer period will mean lower payments, but paying more interest over the life of the loan.
If you have a renewal coming up, one of the things you can do, Murphy said, is start looking around now.
“You can shop around for your mortgage up to six months before your renewal date, giving you time to look at different rates,” he said.
“Without any penalty, you can cancel your mortgage up to six months before.”
The renewal period is also an opportunity to repay part of the capital of your loan. That will mean paying less interest in the long run, but, Murphy said, that’s not an option available to everyone. You must have cash available to make this payment.
Extension of your mortgage
In more serious circumstances, particularly when people hold other debts requiring payment, more serious action is needed.
“A lot of people are going through serious financial restructuring,” said Paul Trainor, a mortgage broker with the Federation of Atlantic Businesses in Charlottetown.
With refinancing, a mortgage is renegotiated and other debts are rolled into it, secured by the value of your home. The mortgage interest rate will be lower than virtually any other loan available.
It is also possible to simply extend your mortgage to reduce these payments.
“If you have a 15 year mortgage it might be time to talk to a mortgage broker and there are plenty of great ones in Prince Edward Island, and maybe extend that up to 25,” Trainor said.
It’s hard to give general advice, Murphy said, because not only do individual situations vary, but there are also many potential solutions.
Like Trainor, he recommends getting professional advice.