Key points
- Compare the new payment with what the same balance costs at your current rate to see the size of the change.
- Shopping the renewal rate still matters: grade the offer against what lenders charged on comparable new mortgages.
- A longer amortization lowers the payment but repays principal more slowly; ask whether your lender allows it and on what conditions.
- FCAC has guidance on managing rising rates, and your lender can explain the options it offers.
The letter arrives
An illustrative household has $380,000 left on their mortgage, with 20 years of amortization to go. They signed their current term at 2.49%. The renewal letter offers 4.79% for five years.
On the same balance and amortization, the payment at the new rate is $2,454.17, against $2,009.41 at the old one: a rise of $444.76 a month. Over the five-year term, the higher rate adds $40,507 of interest.
| At 4.79% | At 2.49% | |
|---|---|---|
| Monthly payment | $2,454.17 | $2,009.41 |
| Interest over 5 years | $82,914 | $42,407 |
| Balance after 5 years | $315,664 | $301,842 |
Where the extra money goes
The bigger payment doesn't pay the mortgage off any faster; the extra goes to interest. In the first year at 4.79%, the household would pay $17,771 of interest and $11,679 of principal, so 60.34% of their payments goes to interest.
Seeing that split helps when you look at the levers below. Some of them lower the payment; only some of them lower the total cost.
Lever one: shop the rate anyway
A higher rate environment doesn't make every offer equal. Grade the letter in the renewal checker: the household's 4.79% gets a mark of 67 out of 100 ("grade C"), 0.45% above a best published rate of 4.34%. On their balance, each 0.25 points is worth about $4,465 over the 5-year term.
Get at least one competing written quote and take it to your lender. Switching at maturity avoids a prepayment penalty, though other costs can apply; see switching lenders at renewal and the mortgage renewal script.
- Rate
- 4.79%
- Score
- 67
- Verdict
- grade C
- grade
- C
- Benchmark
- 4.34%
- typical
- 4.83%
- Gap
- 0.45%
- Direction
- above
- Cost vs benchmark
- $8,007
A bigger payment is easier to plan for when you can see what it's made of.
Lever two: the term
A shorter term means the next renewal comes sooner, at whatever rates apply then. A longer term fixes the rate for longer. Nobody knows in advance which will cost less, so the choice comes down to how much certainty the household wants and what might change in their lives. A move, a new job or a planned lump sum can all make a shorter term, or a mortgage with generous prepayment privileges, more useful than a slightly lower rate.
The checker scores each term against its own benchmark bucket (under three years, three to under five, and five years and over), so a three-year and a five-year offer can each be judged fairly. For terms longer than five years, the Interest Act lets an individual repay after five years with three months' further interest. More in mortgage term length and rate.
Lever three: the amortization
Stretching the remaining amortization from 20 to 25 years on the same balance and rate lowers the payment from $2,454.17 to $2,164.89. The trade-off shows up in the principal: in year one only $8,131 goes toward the balance, instead of $11,679. Repaying more slowly means more interest over the life of the mortgage.
Extending isn't automatic. With less than 20% down, the maximum amortization is 30 years for first-time buyers and/or new builds and 25 years otherwise; with 20% or more down, the lender sets the maximum. If you switch lenders and extend the amortization, a new mortgage loan insurance premium may apply. Ask your lender what it allows.
- Amount
- $380,000
- Rate
- 4.79%
- Payment
- $2,164.89
- Year-one interest
- $17,848
- Year-one principal
- $8,131
- Interest share of payments
- 68.70%
- Monthly periodic rate
- 0.40%
Lever four: prepayments and the budget
If the new payment is manageable, prepayment privileges (extra payments or lump sums up to a set amount each year, without penalty) can bring the balance down faster and reduce the interest the higher rate charges. Check the limits for the new term in the renewal documents; privileges vary by lender, so compare them across offers as well as the rate.
If the payment is a strain, talk to your lender before the renewal date and ask what options it offers. FCAC's guidance on rising interest rates covers what to consider. If you are thinking about renewing early to change your rate mid-term, read blend and extend, explained first.