Extending mortgage period could keep payments in check even as rates rise

Canadian homeowners may be in for a shock when it's time to renew their mortgages, since rising interest rates mean their monthly loan payments will likely climb higher, too.

That's particularly unwelcome as rising prices for gas, groceries and other staples are already eating into household budgets.

Experts say extending the amortization period for your mortgage could keep your monthly payments in check even as you face higher interest rates, but caution that doing so comes at a cost as you will end up paying interest for a longer period of time.

Mike Rocha, director of mortgage experience at Scotiabank, says customers renewing today who may have been paying interest at less than three per cent, or even two per cent, are facing the potential for rates over four per cent.

"There's going to definitely be potential payment shock with some customers," he says.

The amortization period is the period of time over which you repay your loan. That means if you took out a mortgage five years ago to buy your home with a 25-year amortization period, you have 20 years of payments remaining.

By extending that amortization period when you renew your mortgage, you could take the remaining balance on your loan and repay it over a fresh 25-year period — or perhaps even longer, depending on your circumstances. The move would reduce your monthly payment, but because of the extra time taken to repay the loan, you will end up paying interest over a longer period of time.

If you've made extra payments in the past and are ahead of your original payment schedule, Rocha says you should be able to return to your original amortization schedule. To extend your amortization period beyond the originally contracted period, however, he says the process is a little more complicated.

"You have to qualify, you have to check your credit. There may or may not be an appraisal, that is up to the lender. It is a longer process for sure," he says.

While those with a variable rate mortgage have already seen their rates rise as the Bank of Canada has moved to raise rates, those with fixed rate loans won't see an increase in the rate they are paying until it comes time to renew.

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