Mortgage Approach with rising rates

[c-kat]

Curious if the rate hikes are changing your approach to mortgage paydown in Canada? In then US where you can a 15 or 30 year fixed rate it doesn't really change anything, but in Canada where most people stick with 5 years or less, there is going to be a huge rate increase on renewal (unless we go into a recession). 

We currently have 3 years left on our 5 year term (13 year amortization left) at 1.92 % so we aren't paying any extra, but if rates are high at renewal, we're considering putting a lump sum on it from investments. We wouldn't pay it all off, but would try to pay 4-5 years of principal to avoid paying all that extra interest.

[Deano]

You're in a great spot rate wise-3 years of free money!

I would wait until you renew to decide, but one thing is for sure, the era of cheap money is over, recession or not (look up Stagflation).

Putting a lump sum on would be a great way to go if rates are still high.

[FLBiker]

We're in a similar boat -- 3 years to go on a 5-year mortgage.  We'll have 20 years of amortization left at that point.

I'm leaning to paying off a chunk of it / all of it using a combination of cash on hand and our non-registered investments.  If rates aren't that bad, though (say 4 or 5%), I might just get another 5-year mortgage.  We've currently got ~$75K in various high interest accounts (including US I-bonds) and our mortgage balance in 3 years should be ~$194K.  I'm hoping to save another $25K or so in cash, but I expect we'll need to come up with an additional $100K or so to pay the mortgage off completely.  Our non-registered account has a balance of ~$270K as of today, so we could pay if off from that, but that would leave our non-registered account pretty depleted.

We'll see!  Even though it may not make the most financial sense, I'm also leaning towards paying it off because I'd like to FIRE, and having those lower expenses would make me more comfortable.

[Missy B]

Well, I've got just under a year at 2.4%, and I'm using the double-up feature at RBC to make extra payments, and then I'm planning to make a 10K lump sum payment. I'll see what the rates are doing but expect to do a one-year assuming those are best rates.
Even if there's an inversion and the 1-yr isn't the best, I probably won't want to commit to a 5yr term until rates are back in the 3.00's.
I went with a long amortization originally, rolled it forward and then rolled it back when I renewed during covid, so i'm buffered some from large monthly payment increases. And the interest is deductible as it isn't my primary residence. But i don't really want to pay so much extra interest.
It's annoying, because everything that goes into the mortgage isn't going into my build-your-own-pension fund.

[rocketpj]

Some of the more obvious options that I've always done, but I suppose they are more relevant now.

1.  Biweekly payments.  Amortization tends to be calculated based on monthly payments (at least at our bank), but every time we renew we immediately switch to biweekly (splitting a monthly in half for each one).  It works out to a dramatic difference at renewal time (measured in extra principal paid down relatively painlessly).

2.  Lump sums.  If you have a very low rate, set aside money against a lump sum in the future if it looks to be a much higher rate.  Personally I think we won't see rates under 5% again in our lifetimes, so be prepared.

Our house will have about 7 years left when our renewal comes up in 3 years.  If rates are stupidly high I might just close it out.  We're waiting to see.  I'm more concerned about our commercial property, which is at a higher rate now, though at least it has 4 more years at a reasonable rate before we renew.

[chasingsnow]

PTF- I am curious how one thinks that we wont see rates <5% in our lifetime? Source?

[rocketpj]

PTF- I am curious how one thinks that we wont see rates <5% in our lifetime? Source?

I have no source other than history.  Mortgage rates have been over 5% for most of my life, and the past few years have been the anomaly. 

I could be wrong, but when planning non-optional costs I prefer to assume on the 'worst' side and try to mitigate any downsides.  If interest rates stay lowish or come back down I'll be pleasantly surprised, but I'm very interested in not being shocked by overly high rates.

[frugalcanuck]

I was able to lock in a 10 year at 3.03% and have about 9 years left.  If I was a few weeks earlier it would have been 2.75%.   I renewed my mortgage early so it was a blended rate with what we had left. The mortgage agent I was dealing with was really pushing hard for me to go 5 year variable.  We talked about how variable has been better in the recent past and after I showed him I did my homework on this he settled down a bit but still told me he believes I was making the wrong decision.   I still see this as one of the more ballsy money moves I have made in my life.  I am adverse to gambling and felt that this was a gamble that I could live with. We will have $51k left on the mortgage when the renewal comes, so depending on the rates and world outlook we will probably just pay it off when its time for renewal.  We were discussing just throwing an extra $10k a year on it for 5 years just to make it easier but we haven't done that yet. 
With my decision to go 10 years fixed, you can guess that I believe inflation and rates are going to be there for a while. 

[rocketpj]

"I was able to lock in a 10 year at 3.03% and have about 9 years left."

I did the same thing, but it was 7 years ago, so I have 3 left on the current term.  At the time I thought rates were going to go up.  I was right, but off by about 4 years.  It was still the right decision because I was planning a career change and wanted a fixed and predictable payment for planning purposes.

[frugalcanuck]

"I was able to lock in a 10 year at 3.03% and have about 9 years left."

I did the same thing, but it was 7 years ago, so I have 3 left on the current term.  At the time I thought rates were going to go up.  I was right, but off by about 4 years.  It was still the right decision because I was planning a career change and wanted a fixed and predictable payment for planning purposes.

That's what this allowed me to do as well.  Take on more risk (started a business) with greater upside potential.

[Maverick1]

We have 35 months remaining on our mortgage term at 1.89%.  The house is worth ~$650k and the mortgage balance is $145k.  Between our TFSA's and our non-registered stock market investments we have $280k.  I also max out my RRSP every year.  I'm pretty comfortable regardless, if rates are low in 3 years I'll extend for another 5 year term on a fixed rate.  If rates remain high I will simply sell off investments to payoff the mortgage.  If interest rates are somewhere in between (say 4%) then I'll have a more difficult decision to make.

I cannot believe how many people took out variable rate mortgages in the last 2.5 years.  Given what the world was going through I thought rising interest rates was very likely and therefore chose the stability of a fixed rate mortgage when we moved to our current house in October, 2020.

[c-kat]

I cannot believe how many people took out variable rate mortgages in the last 2.5 years.  Given what the world was going through I thought rising interest rates was very likely and therefore chose the stability of a fixed rate mortgage when we moved to our current house in October, 2020.

I know. I can't believe it either, especially when fixed rates were so low, and rates had nowhere to go but up.

[Dogastrophe]

We have 6 months left at 3.45% on my 5-yr term (balance is sub-$200K) and are now getting early renewal offers with rates of 5.69% for 3-year term.

From what I calculated, if rates rise 0.5% between now and end of May, renewing now or renewing in May (at no more than 6.2%), will be a wash for total interest paid / saved. Any more than that, and it will start to cost me more. While I expect that the BoC will make a few more moves, I'm hoping that the banks start offering deals again to get / keep customers. 

We did toss around liquidating our TFSAs and paying it off at the end of the term. While the thought of being mortgage free makes it enticing, long term it feels like it would be a dumb move.

By mid-2023, we will have used up all of our available RRSP contribution room and maxed out the TFSA, so are going to divert extra funds toward the mortgage to knock it down quicker.

It was much easier when rates were dropping! lol