Penelope Graham advises a reader who's faced with higher interest rates and an expensive impending renovation.DARRYL DYCK/The Canadian Press
Question from Ann, 60, in Ottawa: My mortgage expires in June and since I am unemployed, I will need a guarantor to renew. My current mortgage is a five-year fixed at 2.34 per cent. I also need around $20,000 to fix my roof. Should I shop around for the lowest rate and keep my amortization unchanged, or refinance to pull out the extra funds and extend my amortization to keep my payments lower? Should I go fixed or variable?
Dear Ann,
Renewing your mortgage while unemployed is stressful, and the old roof makes it an even larger financial undertaking. Here are your options.
The first decision you face is whether to stay with your current lender. The benefit here is that when you renew your mortgage with your existing lender, they will have little reason to inquire about your employment status as long as you’ve consistently made your monthly payments.
Your lender will still want to know whether you can continue to pay off your debt, but if you’ve got considerable savings or income-generating investments they likely won’t ask to verify your employment.
If that’s the case and you think you can manage without a new roof for a few years, you may opt for a shorter-term two- or three-year fixed. The hope is that you’ll find a job in this time frame and approach your next mortgage renewal with more options.
However, sticking with your existing lender gives you little room to negotiate, and you’ll likely be offered a less attractive rate than a new client would get. Given your existing rate at 2.34 per cent is lower than the best options available today – currently, 3.84 per cent for an insured five-year fixed – getting the lowest rate possible will be key to minimizing monthly payment shock.
This could make it worthwhile for you to instead renew with a new lender, which means disclosing your employment status and likely involving a guarantor, someone who agrees to be liable for your mortgage payments if you cannot cover them.
But let’s say there’s no flexibility in timing that roof repair. Getting the money to fix it will require a cash-out refinance, meaning you’ll need to disclose your employment status – and have a guarantor backing your monthly payments – regardless of whether you stick with your current lender or find a new one.
Refinance mortgage rates can be higher than renewal or purchase rates, but you’ll have access to more options, such as extending your amortization. This will help counter the increase in your monthly payments, which result both from getting a higher rate than your current one, and the larger mortgage size owing to your refinance.
When making this decision you need to consider the long-term impact on your finances. Remember that extending your amortization by even a few years will ultimately increase your interest bill by thousands of dollars. It could also mean carrying your mortgage into your retirement years.
The above scenario also assumes that you do indeed have a guarantor who is able to help you qualify for your new mortgage term. If you don’t, the options are less palatable.
If you have no guarantor and you want to keep your property, a private lender may be able to help you bridge the gap until you find work. But – and I cannot stress this enough – doing so should be a short-term solution, with the intent of switching to a conventional lender as soon as you’re able.
Private lenders are notorious for charging much higher interest rates and may engage in other predatory lending behaviours. It’s important to be aware of the risks.
If your unemployment is longer-term, your last option may be to sell your home – likely in as-is condition because of the roof – and downsize to a smaller property or turn to renting.
If this seems the likely outcome, getting a variable mortgage rate could make sense, given the penalty to break the mortgage to sell is just three months’ worth of interest, compared with the (typically much higher) interest-rate differential calculation lenders use to determine the penalty for a fixed-rate mortgage.
Ultimately, the road ahead comes down to the support you have at hand to make your payments – and whether you can delay the ticking clock of your roof repair.
Do you have a mortgage question? If so, send it our way and we could answer it in an upcoming column. Questions and answers are edited for length and clarity.
Penelope Graham is the head of content at Ratehub.ca.
