Canadians renewing their mortgage this fall are bracing for higher rates – which could more than double the payment amount they originally locked in, since the Bank of Canada has been aggressively increasing its lending rate since early 2022.
But that doesn’t mean there aren’t things Canadians can do to prepare themselves for these increases.
“Folks who know they can’t afford their mortgages at the new higher rates should start contingency planning now,” says Robert McLister, mortgage strategist and editor at mortgagelogic.news.
Part of that planning could include finding a renter, adding a second mortgage or home equity line of credit (HELOC) which can be used to roll in other higher-payment debt, and even selling the home. These are all subject to qualification.
There’s also the option, in some cases, for homeowners to contact their lender after renewal and request payment assistance. That could include an amortization extension or something called a payment holiday, which occurs when the lender agrees to suspend one or more monthly payments. But borrowers be warned that in these cases, the interest will likely still accrue during the suspension.
“It is not a given that lenders will cooperate and offer such assistance, especially non-regulated lenders who are much less liquid and therefore much less flexible,” says McLister, adding that borrowers should prepare to prove hardship if they want to qualify for those programs.
Exploring your options
Indeed, a recent survey of 2,000 Canadians by Mortgage Professionals of Canada (MPC) found that “70 per cent of respondents from across the country say that they’re anxious about renewing their mortgage given the higher rate environment,” says Cecely Roy, director of communications at Mortgage Professionals of Canada.
“That’s why whenever we’re talking about the renewal process, which is extremely stressful for a lot of mortgage holders, we always recommend speaking to a broker and doing so early on.”
Roy recommends Canadians renewing their mortgage consider using a mortgage broker even if they didn’t use one when first applied for a mortgage because their job is to shop around for the best deal for you.
“If you are limited with options, that can impact the affordability of your mortgage renewal,” she says. “Beyond determining whether a variable or fixed rate mortgage is best for you, or what that amortization period might look like, whether it’s extended or not, they can recommend options and come to the table with advice.”
In the interest of allowing Canadians more choice when it comes to mortgages, MPC is asking the federal government to change its requirement that mortgage holders who wish to switch lenders must undergo a stress test, which is something they would have already been through at the time they were first given a mortgage.
Right now, those that choose to stay with the same lender don’t have to take the stress test, since their original one still applies. The MPC argues that insisting on the stress test at the time of renewal limits a borrower’s options by not allowing them to shop around to get the best mortgage.
“As rates have increased over the last year and a half, of course we know that Canadians are in a difficult position,” says Roy. “With this policy change, it would ensure that Canadians are able to find mortgage rates and products that are best suited to their financial needs, particularly in this current environment.”
A triggering situation
Faisal Vallani, senior mortgage specialist with RBC, says he’s having frequent client conversations about renewals and a lot of the focus is going from variable to fixed rates, adding that the “vast majority are going into fixed rates, in particular, shorter-term fixed rates.”
“The biggest conversation we’re having is a lot of individuals that have had variable-rate mortgages, they’re now going to hit their trigger rates,” he explains. “They’ve been basically paying down very little principal over the last little bit since we’ve seen the Bank of Canada start hiking interest rates.”
Villani says the recent pause on rate hikes by the Bank of Canada is likely giving people the idea that this might be the stopping point (at least for a while) “then in late 2024, early 2025, is when we may see the Bank of Canada start to cut rates,” he adds.
But it’s hard to say what’s going to happen.
More increases to come?
Fixed rates are tied to the five-year bond rate while the variable rate is based on the Bank of Canada’s overnight lending rate.
“They’re not over till they’re over. The market is pricing in a 50/50 shot of one more hike this fall,” says McLister. “If core inflation refuses to dip into the two per cent range relatively quickly, even more hikes could be in store. That’s not the market’s expectation, but it’s a possibility.”
If the BoC cuts its overnight lending rate then variable rates will likely follow within a day. The bond markets would then follow, but not as quickly, to drop the fixed rates.
But even with this pause in rates, the time for those who are worried about affording their home is now, according to McLister.
“If we spin into a downturn and prices dive, cash-strapped homeowners lose options. They may have to sell for less (which might not make them whole), they may not have enough equity to refinance or they may lose some income unexpectedly,” he says.
“Until the Bank of Canada signals a longer-term pause and the economic outlook firms up, home prices could potentially slide further.”