Should You Be Worried About a Mortgage Renewal During Inflation?May 05, 2023
With the recently rising interest rates and the rising cost of living, it can be scary if you have a mortgage renewal coming up. That said, it may not be as difficult to renew your mortgage as you may think, your monthly mortgage payments may go up though.
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It really just depends on if you have missed any mortgage payments, what your original mortgage interest rate was, if your income has changed and if your credit score has gone down. Even if some of these factors have changed, it doesn’t mean that you won’t get approved.
What is Inflation?
Inflation may seem like a bad term, but in moderation inflation can actually be a good thing. It can help the economy by stimulating economic growth. It usually stems from the supply chains when the demand is higher than the supply. Because of this, prices rise causing a chain reaction that results in inflation.
That said, high inflation can have the opposite effect. With the higher home prices in Canada’s housing market, and reduced purchasing power, it’s much more difficult for Canadians to not only enter the housing market, but continue to stay in it.
With the higher prices and higher interest rates, more and more Canadians are not able to afford house prices, they are unable to afford daily necessities as those are continually rising too. If this continues for too long, this is when a recession can happen.
A Recession and How the Bank of Canada is Trying to Prevent it
As inflation continues, the Canadian government has to do something in order to curb it, especially since it has been drastically higher than the recommended 1%-3%. In January, 2023, it got as high as 5.9%. Action had to be taken to lower it to the target rate of 2%. This is referred to as quantitative tightening.
When the Bank of Canada (Canada’s central bank) considers inflation and following monetary policy, there is only so much they can do to combat rising inflation rates. In fact, they were the highest they have been in 25 years. The best way for them to combat inflation is to raise their overnight rates. When this happens banks have to do the same. That said, while it does work and is having the desired effect, it can make some things more difficult in the short term. Things like financing, mortgages, and navigating unsecured debt can get tricky. In the short term, these things can end up costing you more money.
How it Affects Mortgage Renewals Directly
Prime rates are the base interest rates that banks use when it comes to any kind of lending. With the rise in prime rates, all lending institutions rates will have to reflect that. Whether you already have a mortgage or not, it can still affect you.
There are two kinds of mortgage rates: fixed rate mortgages and variable rate mortgages. If your mortgage rate is fixed, then you probably won’t be affected until it’s time to renew. With a variable rate, the impact will be immediate. Either your monthly payments will increase or more of your monthly payments will be going towards the interest instead of the principal.
How a Mortgage Renewal is Affected by Inflation
How you are affected when it comes time to renew your mortgage term really just depends on a few different factors:
- Payment history
- Credit score
- Monthly income
- Debt to income ratio
If you have a good financial relationship with your current lender and haven’t missed any payments with them, they may just offer you a new mortgage. That said, the payments may be more than you are used to with the higher interest rates. In some cases, they may not even run another credit check, especially if your monthly income hasn’t decreased since you bought your home or renewed your last mortgage. The lower rate you had before just may not be possible.
If you have missed mortgage payments in the past, it may be more difficult to get a mortgage renewal, especially with the same lender. This can be made more difficult if your credit score dropped and you have less income coming in than before. There may be some additional requirements you have to meet in order to get an approval.
Options for Getting a Mortgage Renewal
Even if you are unable to get approved for a renewal by the same lender, you still have plenty of options. Many Canadians choose to go through some of the big banks because they have some of the most competitive rates. You could also get a mortgage broker to help you switch lenders. They will be able to help you find the best rate and payment options to fit your needs.
Can Spring Financial Help?
With today’s housing prices, the higher rates and the market conditions, getting a pre approval can be overwhelming. Did you know that we offer mortgages? Whether you are looking for a new purchase or need to renew your mortgage term, we can help you find the right lender. Even with the rising mortgage rates, there are still plenty of options available to you. You can apply online and one of our licensed agents will be able to help you.