Buying a home is one of the biggest financial decisions most Canadians will ever make. Whether you’re already a homeowner, or looking to get into the real estate market, home financing will likely be part of your process.
There are many considerations when deciding on which home financing option is right for you, or what you should do next if you have a mortgage: Should you refinance or renew your mortgage? And if you have some extra cash, should you put it towards paying down your mortgage?
TD Stories rounded up some commonly asked questions current and prospective homeowners have when it comes to all things mortgages.
Is locking in a fixed mortgage rate a safer bet than a variable mortgage in today’s economy?
If you’ve been following the Bank of Canada’s (BoC) rate announcements, you’ll know that its overnight lending rate has increased since 2020, reaching 5% in 2023. But it has since come down: As of October 2024, the central bank’s overnight rate sits at 3.75%.
The BoC’s lending rate serves as a reference point for the interest rates that financial institutions charge their customers on financial products, such as mortgages and loans. That means when the central bank’s lending rate goes up, it can be more expensive for Canadians to borrow money. And when it goes down, it can become cheaper.
A fixed rate mortgage means your interest rate will not change over the term of your mortgage loan, and neither will the amount of your principal and interest payments. People might opt for a fixed rate mortgage so they know what their mortgage balance will be for the duration of their mortgage term.
People with variable rate mortgages can experience the fluctuations of any change in the central bank’s lending rate. When rates fall, Canadian homeowners with variable rate mortgages who have fixed payments would see a higher proportion of their payment go towards the principal amount on their mortgage. Variable rate mortgage holders who have variable payments would see their variable payment amount shrink.
Deciding whether to go with a fixed rate or variable rate mortgage is a personal choice that depends on factors such as risk tolerance and financial circumstances, to name a few. Before making the decision to switch from a fixed to a variable rate (or vice versa) at renewal, the best advice is to focus on the features and benefits you expect in your next term and don't let current rates sway your decision.
If you are concerned with interest rates rising, fixed rate mortgages could be more appealing to you because your mortgage rate will not change for the term of your mortgage. Variable rate mortgages tend to be popular when interest rates are falling.
If you do choose a variable rate mortgage and rates begin to rise, at TD, there is always the option to switch to a fixed rate mortgage at current rates, subject to certain conditions.
My mortgage is up for renewal soon. What can I do to get the best available rate?
TD recommends starting the mortgage renewal process early. Lenders may let you renew your mortgage loan up to 120 days before maturity without charging a prepayment charge.
When it comes to renewing a mortgage, it’s important to know all the options available to you. You’ll want to look at the various offerings from your lender and re-evaluate your current financial position and goals to determine the kind of mortgage loan right for your lifestyle.
TD customers who are approaching their renewal date should review their existing payments and use a tool like the TD Mortgage Calculator to get a sense of what their payment would be at current interest rates. Once you’ve done your research, determined your rate expectations, and reviewed what’s available online, you can reach out to a TD Mortgage Specialist with your expectations and goals. Even if you don't reach out to the Bank, you can still expect to hear from TD anywhere from four to five months in advance of your maturity date.
I have some extra cash. Should I use it to pay down my mortgage?
A lump sum payment is a payment you make toward your mortgage, outside your regular payments. If you have some extra cash available, you might want to apply that money as a lump sum payment towards lowering the principal of your mortgage to help reduce the total amount you owe on your home. However, you should find out from your lender if there is any prepayment fee that would have to be paid as well.
At TD, a closed mortgage can be paid off at the end of your term without prepayment charges. If you decide to pay off the mortgage at any other time, you may be subject to additional fees called prepayment charges. With a closed mortgage, you can still prepay up to 15% of your original principal amount annually. For example, if your original mortgage principal amount was $400,000, then you can make a lump sum payment of up to $60,000 every year. And you can prepay up to 15% of the original principal amount through a lump sum payment all at once — or over time during the calendar year as long as the prepayment is at least $100. You can speak with a TD Mortgage Specialist for more details.
A TD open mortgage is best suited for those who plan to pay off or prepay their mortgage loan without worrying about prepayment charges to help shrink the principal and pay off the mortgage faster.
The goal of making a lump sum payment is to help reduce your principal so that when it comes time to renew at the end of your term, you have a smaller outstanding balance.
Mortgage renewal or refinancing: Which is right for today's market?
The decision to renew or refinance is a personal one, and homeowners should consider both their financial circumstances and terms of their mortgage. If you have a mortgage coming up for renewal soon, it's a good idea to reach out to your financial institution 4-6 months in advance to discuss your options for renewal.
As you get closer to renewing your term, TD recommends researching the latest rates, so that you have a sense of what your new payment amount will be. From there, you can confidently assess your renewal options and make an informed decision when you agree to a new term.
Refinancing a mortgage can be done before your mortgage is up for renewal. When you refinance, you are renegotiating your existing mortgage loan agreement to consolidate debts or use the equity in your home to increase your loan amount for large expenses, like a renovation, for example. There may be prepayment charges depending on when you choose to refinance your mortgage, but by refinancing at renewal, you may be able to avoid prepayment charges.
Whether you decide to renew your existing loan agreement or refinance, a TD Mortgage Specialist can help walk you through your options and guide your through the process.