Mortgage renewal risk in a buy vs rent decision

Where the risk comes from

A five-year fixed term protects you from rate moves for five years. It does nothing after that. When the term ends you renew at whatever the market offers, on the balance still owing and the amortization still remaining.

Three things then matter: the renewal rate, the remaining balance and the remaining amortization. The balance is lower than the original loan, which softens the blow, but the rate applies to every remaining year.

The example below is the usual illustrative base case: a $600,000 home with 20% down (a $480,000 loan) at 4.5% for a five-year term, a 25-year amortization, 3.5% yearly appreciation, $2,300 monthly rent growing 3% a year, a 5.5% investment return, 2% inflation and a 10-year stay in Alberta. These are planning inputs, not forecasts.

Payment shock at year 5

After five years of payments the balance is $421,423. Renewing at the same 4.5% over the remaining 20 years leaves the payment where it was, at about $2,657 a month.

Renewing at 7.5% instead raises the principal-and-interest cost by about $709 a month from year 6 on. In the engine's year-by-year output, the owner's annual cash outlay in year 6 is $55,787 at 7.5% versus $47,282 at 4.5%, a difference of roughly $8,500 a year.

The renter in the comparison benefits from the same shift. Both households are assumed to spend the same total monthly budget, so when the owner's cost rises, the gap the renter can invest grows too. That is why the swing in the final result is larger than the extra interest alone.

What the renewal rate does to the 10-year result

The table changes only the rate at the first renewal; the first five years stay at 4.5%.

Shorter terms and longer exposure

How long you stay exposed to a bad reset also matters. Suppose the first term is priced at 4.5% and every later period resets to 7.5%. The 10-year result is -$102,949 with a one-year first term, -$67,368 with a three-year term and -$24,334 with a five-year term, because a shorter first term means more years at the higher rate.

This is not a recommendation to prefer any term length. A shorter term may carry a different starting rate, and the right choice depends on your own budget and tolerance for uncertainty. The point is to make the exposure visible. Read mortgage types and buy vs rent for how fixed and variable products differ.

Falling rates are a scenario too

Renewal risk cuts both ways. If you start at a high rate and renew lower, the result improves. On the base case, a 7.5% starting rate that renews at 4.5% gives -$58,018, which is better than the -$126,901 you would get if 7.5% persisted, but still behind. A 3.5% renewal gives -$35,583.

A fair comparison tests both directions. Planning around a rate drop you hope for, when the numbers only work if it happens, is a fragile plan. See interest rates and buy vs rent for starting-rate tests.

Checks to run before relying on a comparison

A few practical checks make a renewal test useful:

• Re-run your own numbers with a renewal rate 1, 2 and 3 points above the starting rate.
• Check the household budget at the higher payment, not only at the starting payment.
• Ask your lender what options exist at renewal and what prepayment or switching rules apply, because these differ between products.
• Note that the stress test applies to new qualifications, and straight switches of uninsured mortgages at renewal are generally exempt; confirm the current rule.
• Keep a cash buffer for the month the term ends.

What this does not model

The comparison assumes you keep the home through the stay and renew with the same lender conditions. It does not model a missed payment, a change in income or the option to shorten amortization at renewal. It treats rate scenarios as illustrations, not forecasts.

For the wider picture of how a single assumption can swing the outcome, see sensitivity analysis. The mortgage payment tool shows payments at different rates, and the break-even tool shows the timing.