Traditionally, downsizing is thought to be for older adults and empty-nesters who no longer wish to maintain a large family home. But with few signs of relief from the high cost of living these days, many homeowners of all ages are reconsidering their options when the time comes to renew their mortgages.
For those struggling with inflation or rising interest rates, moving to a smaller home or less expensive neighbourhood can lead to greater peace of mind. Is this a route you should take? Renewal time doesn’t just have to be about your mortgage. Instead, it can be an excellent time to review your goals and think about what you want over the next few years.
Mortgage Renewals 101
Before you even consider whether to sell or stay, it helps to have a big picture of how mortgage renewals work. The typical amortization period is 25 years. If all goes well, your loan should be completely paid off by then, and your house will be yours, free and clear! Why do mortgages renew at all?
25 years is a long time, especially if you end up stuck with a high interest rate. On the flip side, the bank doesn’t want to shortchange itself when rates are low. To balance things out, a mortgage gets broken down into terms, usually about five years.
At the end of the term, you can either pay off your balance if you are in a position to do so. If not, renewing your mortgage means you can renegotiate the rate and terms. You can choose to stay with your existing lender or move on. Many things can change during this phase, which is why it’s an excellent time to reassess and prioritize what you want in life.
If you haven’t bought or sold a house for some time, the posts below are a great place to get some background knowledge:
- What Is the Real Estate Closing Process in Canada?
- What Is the Property Ladder?
- Everything You Need to Know About Land Transfer Taxes
Variable Vs. Fixed Rate Mortgages
As your mortgage renewal date comes closer, you will have the chance to reevaluate what terms work best for you. One of the first decisions is whether you will go with a variable or fixed-rate mortgage. Either option may have advantages and disadvantages in the long run. Here’s what you need to know:
Variable Mortgages
A variable rate mortgage can change often throughout your term. That said, they are often, but not always, less than fixed mortgage rates. If rates go down, your monthly payments will also be less. However, when rates rise, your payments will also increase.
For some people, these fluctuations can lead to anxiety as rates can change several times each year. But if you are prepared for the risk, a variable mortgage can save you money over the course of your term.
Fixed-Rate Mortgages
As the name implies, your rate is locked in with a fixed mortgage. Unlike variable mortgages, they’re not affected by the Bank of Canada rates that can change several times throughout the year. Fixed mortgage rates are tied to government bond yields, which are far more stable. On the one hand, you won’t have the benefit of lower payments when bank rates decrease. What you will have is peace of mind knowing your payments won’t suddenly increase with very little notice.
How can you decide which path is right for you? Think about the current rates and your ability to handle fluctuating payments. Since no one can predict which way the Bank of Canada or government yields will go, there’s no need to stress about getting it perfect. You just do the best you can with the knowledge available in the moment.
- If rates are at a historical low, you might want to choose a fixed mortgage to lock it in for the next few years.
- When rates are high, your decision can be a little more challenging. You can choose a variable mortgage in the hopes they will decrease in the near future. However, you will need to be prepared to make your payments and potentially cover further increases in the meantime.
A licensed mortgage broker can help you analyze the market and your circumstances further so that you can make the best choice for you.
Should you fund your dream retirement by investing? If the thought intrigues you, read Can An Offline Senior Become A Real Estate Investor In Today’s Market? next.
Assessing Your Resources
Can you make your mortgage payments comfortably while still being able to afford the incidentals in life? Or do you find each month a struggle to get by? These questions are important to assess your financial health.
If you find your finances a little stretched when the mortgage payment comes out, think about how much more challenging it will be if interest rates have risen since you first took out your loan. In this case, selling your home in favour of something less expensive can provide immense relief from your debt burden.
However, if you have funds left over and are able to save money each month, remaining in your existing home is a reasonable goal. The question is whether this is still what you want.
Your situation may fall somewhere between these two extremes. For example, you may not have much in the bank once all of the bills are paid, but still have a significant amount of equity. An experienced financial advisor can help you assess your resources compared to your debts. When it comes to money and real estate, information is power. Accurate and unbiased calculations can help you move forward with confidence, whatever you choose to do.
Are Interest Rates the Deciding Factor?
A one-point interest rate hike may not sound like much. But if you’re whittling away a mortgage of a million dollars or more, a move in either direction can have a massive impact to the tune of thousands of dollars every year.
If an increase has made your payments less affordable, looking for a less expensive house is an option. However, you may not necessarily have to pack your bags if you don’t want to. A mortgage broker can help you shop different lenders to help you find the best possible rate.
Alternatively, your lender might work with you by extending your amortization period rather than raising your monthly payment. Just keep in mind that you will be paying longer, and more of your payment will be going to interest rather than the principal.
Looking for more tips for a seamless downsizing process? The posts below will help you plan your next steps:
- Your Guide to Downsizing in Toronto in Style
- Where Do Toronto Downsizers Go?
- Should You Retire Near The Waterfront In Etobicoke?
What Are Your Dreams for the Future?
Financial stability may be at the top of your mind as you decide whether to stay in your home or downsize. However, your decision often depends more on your lifestyle than anything else. Ask yourself, how does the thought of a smaller home make you feel?
If a family member has recently moved away, your house may suddenly feel empty and much larger than it needs to be. The idea of a change in scenery might be just what you need for a fresh start.
Selling your house and moving to something less expensive can also enhance your lifestyle in ways you may not even be able to envision now. If you’ve always dreamed of backpacking across Australia or driving down the coast of California, now just may be the time!
On the other hand, if your idea of a vacation is a trip to Puerto Backyarda where your dream getaway exists just outside your patio doors, downsizing may be off the table – for now.
A Wealth of Downsizing Options
If you decide to supersize your finances by downsizing your house, what’s the next step? It could be a simple matter of selling your home and then choosing a new one. However, you have numerous options. For example:
- What if you don’t sell your house at all? If you have a finished basement, you might decide to fix it up and rent it out. Alternatively, you could live in the basement suite and rent out the rest of the house to earn even more passive income.
- Should you rent instead of buying? Renting doesn’t build equity, but it does free you from many of the responsibilities of owning a home. It also costs much less upfront than buying since there is no down payment to worry about. If your existing house is paid off or mostly paid off, renting could be a very viable option.
- You could keep your existing home and use the equity as a down payment for a condo or townhouse. The rental income allows you to keep your property in your family. Best of all, your equity will grow twice as fast as both houses rise in value.
Making the most of your sale now will open more doors when choosing your next steps. The resources below will help:
- How Do I Attract High-Quality Buyers to My Listing?
- Everything You Need to Know Before Selling Your First Home
- 3 Tips For Selling Luxury In The Current Real Estate Market
Preparing for a Seamless Transition
If your decision is made, the toughest part of your transition is over and done with! Now, it becomes a matter of logistics. A stress-free move begins with the successful sale of your existing home. The faster it sells and the more you earn from the transaction, the more empowered you will be for your next steps. Regardless of how the market is behaving, you can follow a simple plan for a seamless transition:
Decide whether you will buy a new home or sell your existing one first. This can be a complex topic worthy of a discussion all on its own. Your real estate agent can help you assess the market and your resources to determine your best course of action.
- Your listing price is critical for a successful sale. Start with an understanding of current real estate trends before assigning a value to your home. For the most up-to-date information, ask a local real estate agent to perform an in-depth CMA (Comparative Market Analysis).
- Get ready to impress potential buyers by cleaning and decluttering so each room of your house sparkles and shines. You likely don’t have to go all out with renovations; a fresh coat of paint and a few strategic updates can be all the transformation you need.
- Consider professional staging to take your showings to the next level. Done right, staging helps buyers imagine the home as their own, which can also help you earn more from your sale.
The thought of downsizing may seem like a monumental task. However, it becomes much more manageable once you start breaking it down into smaller steps. With a clear vision of your future in mind, you may even enjoy the process as you look forward to yet another grand adventure in your life.
Whether you’re ready to make a move or just have questions about getting started, we are here for you every step of the way. Reach out today to ana@asantos.ca or call 647.232.7317 for more information.