Homeowners and prospective homebuyers are increasingly feeling the pinch of the Bank of Canada’s interest rate hikes. Homeowners who are renewing their fixed- or variable-rate mortgages will likely see a higher rate upon renewal – double the interest rate that they locked in their mortgages at. Let’s delve into the survey’s findings to understand how interest rate hikes are affecting Canadian homeowner mortgage renewals in Ontario.
Mortgage renewals: Léger survey of homeowners in Ontario
The housing crisis in Canada has been a pressing issue across the country, especially given inflation and interest rate hikes. Léger is the largest Canadian-owned market research and analytics company, with more than 600 employees in eight Canadian and US offices. The survey was conducted from August 18 to 20, 2023. Canadians were asked about their perceptions of increasing rental costs, worries about paying their rent/mortgage, and agreement with potential government actions to improve the rental situation in Canada.
According to this survey, on behalf of RATESDOTCA and BNN Bloomberg, 62% of homeowners are concerned about higher payments when their mortgage is up for renewal. This marks a 9% increase from the same survey conducted last year, when only 53% of homeowners voiced their concern over higher payments upon renewal. To put it in perspective, historically, most Canadian homeowners have opted to hold a five-year mortgage. If a homeowner signs onto a variable-rate mortgage at 3% in 2018, they might now expect to pay around 6.05% on their mortgage payments – the highest it’s been in the past 16 years. This translates into an additional $200 per month, or $2,400 per year. It’s no surprise then, that Canadian homeowners are feeling increasingly concerned about their ability to make these monthly mortgage payments.
- Younger homeowners are more likely to be concerned about higher mortgage payments.
- 73% of those in the age group of 18 to 34 are concerned about increased mortgage payments.
- 69% of those polled in the age group of 35 to 54 are concerned about increased mortgage payments.
- Respondents ages 55 and older state that they’re not concerned about increased mortgage payments.
- 56% of homeowners polled have a plan in place to cover these increased mortgage payments, 14% don’t really need a plan because they can easily afford the increase, and 21% don’t have a plan.
- 5% of those polled plan to take on debt to cover mortgage payments, versus 2% last year.
- 15% of Canadians who own their primary residence have rental space that they are not currently renting. The same proportion can turn part of their space into something rentable, but have not.
Will interest rates go down in Canada in 2023?
Mortgage rates have increased by 75 basis points so far in 2023. We will not likely see interest rates go down at any point over the remainder of 2023. The target rate will likely be held at 5% for the remainder of the year, but we may see another 25 basis points increase this fall, bringing the target rate to 5.25% to close out the year. Experts are now predicting that we will likely see gradual 25 basis points per quarter rate cuts starting in Q2 of 2024 instead of the end of 2023, as initially anticipated.
Mortgage shopping tips to save on your mortgage renewal or re-finance
Experts say Canadians bracing for higher payments when they renew their mortgages in 2025 and beyond should start planning now in order to best manage the increase. According to the Bank of Canada (BoC), one-third of mortgage holders have already seen payments increase compared to February 2022, before the central bank started hiking its interest rate. The Bank says by 2026, nearly all mortgages will have seen payments increase. “There is definitely a concern about affordability of mortgage payments among Canadians,” Cailey Heaps, CEO and broker with Heaps Estrin Real Estate Team. “People are already feeling the pinch, and shouldn’t assume it’s going to get better in the next year or so… Some people have an optimistic view on where rates may go, but we’re not expecting them to go back to where they once were. Don’t string it out until it’s too late.”
Fixed vs. variable mortgage rates
The Bank of Canada (BoC) stated in its Financial System Review report released in May, “Assuming mortgage rates evolve according to current market expectations, the median payment increase over the 2023-2026 period will be about 20%. While increases in mortgage payments should be manageable for most households, the impact will be more significant for some.”
If you are a homeowner with a variable rate mortgage, you will face a more significant impact to your payments. Renewing for the first time since signing onto low rates years ago, you will have to either hike your payments or come up with a lump sum if you want to pay your home off in the same timeframe. That’s because current payments are only covering the interest on the mortgage, leaving the principal untouched. A Desjardins report says that for some variable-rate borrowers, that lump sum can be as much as $160,000.
Counting yourself as one of the fixed-rate borrowers, know that you are also not immune to the impacts of higher interest rates. In all likelihood, you will also face higher monthly interest payments as a result of rising rates. The Bank of Canada says the average increase in payments at renewal for fixed-rate mortgages will be the greatest in 2025 and 2026, at between 20% and 25%. Experts postulate that you will have to pay more and will also need to earn more in order to maintain the same lifestyle you have now. Many recommend putting money aside for this eventuality in two or three years.
Being proactive is key when it comes to mortgage renewals
For those looking at mortgage renewals, it is important to attack the situation proactively. What that will likely mean for many is renegotiating their mortgage terms and applying to extend their amortization. Some homeowners who were initially signed onto a 25-year amortization are extending it to 30 years to make the payments more manageable. Victor Tran, a mortgage expert at RATESDOTCA, advises homeowners to take a proactive approach, and renew their mortgages before the renewal date. “Most people wait until a month or two before their mortgage renewal date to speak with their mortgage lender,” he explains. “But that might be too late. By then, the rate may be higher and it’s not enough time to switch lenders.”
Historically, you will need a minimum of four to five weeks to switch lenders. Therefore, Tran advises homeowners to start making a plan to reduce their mortgage payments four months ahead of their renewal date. You can notify your lender to confirm an effective renewal date to avoid incurring a penalty fee if you break your contract before renewal.
Important to note: Not every lender may allow you to put in an effective renewal date in order to lock in a favourable rate. Shop around for a better term and rate with mortgage lenders as staying with your current lender – even if that means a higher rate – may result in a major missed opportunity to keep your monthly payments down.
To sell or not to sell?
Another option for people facing higher interest payments is to sell their home. However, Mortgages of Canada CEO and broker Samantha Brookes says few are choosing this option. Brookes says she has seen more clients opt to invest in basement rental suites as a way to offset high mortgage payments and help with affordability. “You can understand where they are coming from. Where are you going to go with these high prices?” she says in an interview. “People are hanging on to their homes for dear life.”
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Final thoughts on mortgage renewals in Canada
If you are up for renewal, your mortgage rate should be selected based on your financial goals for your home. Your rate choice will also depend on stress testing of your mortgage if you choose to switch lenders. Make your decision based on your needs. If you don’t plan on selling or moving, go with a longer term. Conversely, if you need to move lenders, choose a term that works for your situation and shop for the best rate. If you have any questions regarding your home insurance policy, please contact isure!