When Is It a Good Idea to Extend Your Mortgage?

Ron Thompson | Pension & Financial Wellness Committee Member

When my wife and I were younger, just starting our family, we struggled to balance our finances and find enough extra cash to save for retirement. A fruitful visit to a debt counsellor gave us the knowledge and confidence to take action and turn our situation around, but the first step was a bit frightening — we were advised to apply for an extension on our mortgage.

It might seem counter-intuitive at first glance: to get out of debt, we had to increase our debt with the bank. But in the end, it was the right choice for us, and it allowed us to turn our situation around. I should start off by saying this is by no means the best choice for every person or every situation. It requires careful planning and specific circumstances to be an effective way to improve your debt situation. And, of course, you should always talk to a qualified financial advisor, like we did, before making the decision to modify your mortgage agreement.

Advantages of Extending Your Mortgage to Cover Debt

There are a few main reasons you might want to use a mortgage extension to consolidate debt.

First, mortgage interest is usually lower than credit cards, personal loans, or lines of credit. By paying installments on one debt instead of many, it’s easier to keep organized, manage your budget, and ideally less of your monthly budget is allocated to debt repayments. This allows you to keep more money each month to contribute to savings.

The other big advantage is that your mortgage payment, whether fixed or variable, is more predictable. With a fixed rate, you know exactly how much you’ll need to allocate towards your payment each month, and even with a variable rate, you can make short-term budgeting decisions that help you stay in control.

Risks of Extending your Mortgage

The big downside of extending your mortgage is simple to understand. You are paying more money than originally intended, over a longer period of time, with more total interest paid. For us, this was still the right choice, as it allowed us to exert more control over our debts.

The biggest risk is that you will fail to change your spending habits, and that’s where the whole plan can fall apart. If the reason you got into debt is because you were spending beyond your means, you need to change that behaviour for a mortgage extension to be worthwhile. Our mortgage extension allowed us to pay off all our debts, except for the debt with the bank, and we kept our spending in check after that point. If you continue to overspend with your credit card, your debt will continue to grow.

If your spending continues to be out of control, you now have the added risk of being unable to pay off your mortgage, meaning what is likely your greatest financial asset, your home, is at risk.

You also want to ensure your income will remain consistent. For retirees, our income is predictable, easy to plan for, but if your ability to make your payments is reliant on a part-time job or other source, you want to make sure that income source is secure.

What Worked For Us

At the time when we extended our mortgage, our broker gave us a variety of choices to pick from:

• The term of the mortgage: We had a choice between a 3-year term and a 5-year term.
• A fixed rate or a variable rate mortgage. A fixed rate mortgage is a mortgage for which the rate of interest stays the same during the entire term of the mortgage, while in a variable mortgage, the rate of interest varies, as the prime rate of interest varies. A variable mortgage can be riskier, since the actual rate of interest you will pay is unknown at the time of obtaining the mortgage. Often, a variable rate can work out to be cheaper if you are willing to take the risk.

When we renewed, we negotiated a variable rate for a 3-year term. A shorter term meant that we could have a closer watch on the average interest rate we were paying. We could go back to a fixed rate for a longer term if the prime interest rate was trending higher. We also opted to pay the maximum amount we could when the mortgage term came to the end of each 3-year term. Using a series of 3-year terms, we were able to pay off our mortgage sooner than we would have with a series of fixed rate mortgages.

With careful budgeting and financial planning (with the help of an advisor) we have been able to stay out of debt and feel secure in retirement. But if debts are currently a struggle for you, or for your loved ones, I recommend talking to an advisor. There are options out there that you may not have considered, or that might have seemed counterintuitive at first. It’s always worth asking.

Ron reminds readers, ARTA's Pension & Financial Wellness Committee provides financial articles for general information purposes only. What is written here does not constitute professional advice. You should not rely on, or take any action based on the information provided alone. Always speak to an advisor before making significant financial decisions.