The Impact of Rate Hikes: What Renewing Your Mortgage this Year Means for You

Like many owners, Ian Marsden has been following the Bank of Canada very closely lately. He bought a house in Calgary in 2018 with a five-year fixed rate loan at around 3%.

He opted for a 25-year term, and because he chose an accelerated bi-weekly payment plan, each of his $750 payments put him on track to pay it off well ahead of schedule.

By the time his loan was due for renewal this year, he was on track to pay it off in as little as 15 years, having made a few extra payments along the way.

The bad news, of course, was that his loan renewal had to coincide with the most aggressive rate hike campaign since the Bank of Canada started inflation targeting, raising the central bank rate from 0.25% in February 2022 to 5% today.

He discussed his options with his mortgage broker and, not liking the look of much of what he was seeing, he opted for another fixed rate loan at just under 5%. This is a 26% increase over what he was paying before, although for him the peace of mind was worth it.

“It’s a couple thousand dollars more a year,” he told CBC News in an interview. “But I’m fixed again because with the chaos I don’t think it’s getting better anytime soon.”

Millions of Canadians might be inclined to agree. According to official figures, there are currently six million residential mortgages in Canada, and about 1.2 million of them need to be renewed each year. About a third of all mortgage holders have already seen their rates increase, and everyone should expect to start paying sooner.

Mortgage broker Ron Butler says anyone with a mortgage should prepare for much higher rates and payments than they likely expected. “In some cases, double the rate they knew and just bigger payments in the future,” he said.

Thousands of dollars more per year

The numbers add up quickly. Before the recent rate hikes, if you were lucky, you could have signed a variable rate loan of around 1% in January 2022. At that rate, a 25-year mortgage of $400,000 would cost $1,507 per month.

If that mortgage went up alongside the Bank of Canada hikes, last week that loan was at 5.75% and costing $2,500 a month. This week’s hike would have cost $59 more.

Add it all up and it’s over $12,600 more every year.

Lately, Butler says he hears borrowers daily with a desperation in their voices he’s never heard before.

“We’re getting calls from some people who are actually in tears,” he said. “They have a renewal [and] they don’t know what they’re going to do.”

Butler said lenders delayed some of the payment shock for many borrowers by extending amortizations. This provides initial relief by keeping monthly payments stable, but it adds years to the life of the mortgage by effectively turning them into interest-only loans.

“We hear these stories of 70-year amortization, 90-year amortization — instead of paying off your mortgage, these people’s mortgages are getting bigger,” Butler said.

But it doesn’t work forever, because the debt has to be repaid under possibly worse terms later.

“On renewal … those rates, those payments are going to go up,” Butler said.

WATCH | Why some mortgages grow even as you make your payments:

Kara Hishon knows this first hand. She lives in Stratford, Ontario with her husband and three children. They bought their family home in the summer of 2018 with a 2.8% fixed rate loan, which kept payments within their budget. While they love everything about their home, the same cannot be said for the loan options presented to him now that their five-year term is over.

Hishon says she’s shopped around, but other lenders’ rates are all about double her current rate, so she’s leaning toward an increase with her existing lender, to 5.75%.

This will add around $400 a month to their mortgage costs — and comes with another catch: In order to keep payments comparable, they’ve had to undo the diligent work they did to bring their original loan back to 16, and re-amortize at 30 years old.

“It’s a bit of a shame to have to give that up,” she said in an interview, “but there’s no way we could have done it any other way.”

The loan has another unconventional wrinkle in that it is for three years, as the Hishon family hopes to be able to renegotiate on better terms at that time.

There’s a lot of that kind of feeling out there. Generally, fixed rate loans are the most popular option for buyers, especially first-time buyers. But the Bank of Canada’s decision to cut interest rates to near zero during the pandemic has caused many to turn to variable rates.

Personal finance author Preet Banerjee says variable loans generally have lower rates than fixed loans because of the peace of mind that comes with foreclosure.

“A lot of people will actually put a premium on predictability, and that’s normally what you pay with a fixed rate,” he said. “But that premium between variable and fixed rates is upside down right now,” which is why more and more people are choosing the peace of mind of predictable fixed rates, but for a period of time. shorter so they can try a better deal once things inevitably pick up.

While there is no magic formula that will bring borrowing rates back to the levels seen in 2020-2022, Banerjee’s advice to those renewing is to make sure you do your homework, enlist the help of broker and don’t just blindly sign the renewal notice your lender sends you.

“The sooner you start looking at your options, the better.”

Leticia Lam did just that.

She lives in Toronto with her brother and her retired parents, and as the main breadwinner she decided to start shopping earlier this year for a new loan on the house they bought in 2019.

She still has a few weeks left before renewal, but she knows that the four-year 2.79% term she got last time won’t exist, and she could be facing a rate that starts with five, six or more.

“The rate is going to more than double, so my monthly payment will go up by at least $600 to $1,000 each month,” she said.

As an engineer, she knows she has a higher income than most, but she and her brother have had to cut expenses and try to earn money to keep the roof above their heads.

WATCH | Some owners extend the term of their mortgage:

What to consider when renewing your mortgage at a higher rate

With four million Canadian mortgages due for renewal by 2026, many borrowers are facing higher interest rates for the first time. Experts assess the options you have to ease the pain.

“It’s still tight,” she said. “My salary does not increase with inflation.”

She’s resigned herself to taking out the best deal she can find when her loan comes later this summer, and while she says she has no choice but to make it work, she wonders why people like her have to pay the price to bring inflation down for everyone.

“The rich get richer and everyone else gets poorer,” she said. “It’s not sustainable.”