Renewal payment shock, calculated exactly

A renewal is not a new mortgage. Your balance at maturity is re-amortized over the amortization that is *left* — twenty years, not twenty-five — so the same principal is being repaid over a shorter horizon at a higher rate. Both effects push the payment the same way.

That is why a rate moving from under 2% to the mid-4s does not raise a payment by the ratio of the rates. On the example below it raises it by a quarter, and at the top of the range by nearly half. The arithmetic is not surprising once it is written down; what surprises people is that nothing warns them before the letter arrives.

There is a second, quieter effect. During a term at a very low rate, more of each payment went to principal than it would have at a higher one — so borrowers who took the low rate arrive at renewal with a *smaller* balance than they would otherwise have had. It softens the shock slightly. It does not come close to offsetting it.

The levers are known and none of them is a trick. Prepaying inside your privileges lowers the balance the new payment is calculated on. Extending the amortization at renewal lowers the payment and raises the lifetime interest, which is a real trade rather than a free one. And shopping the renewal rather than signing the mailed offer changes the rate the whole calculation runs on.

The one that has to happen early is the shopping. A switch to another lender takes weeks, needs an approval, and — depending on who regulates the two lenders and whether your mortgage is insured — may need you to pass the stress test again. Starting four to six months out is the difference between a negotiation and an acceptance.

Whatever the number turns out to be, it is knowable now. Every input except the rate is already on your statement, and the rate is the one thing you can put a range around.