From the surging demand in real estate due to ultra-low interest rates to the sudden rise in interest rates not seen in a generation, staying updated on the ever-changing mortgage landscape has been challenging. Now, with interest rates expected to remain high for an extended period, homeowners who secured low rates in previous years are bracing themselves for financial hardship when their mortgages come up for renewal.
According to Royce Mendes, managing director and head of macro strategy at Desjardins, around two percent of mortgage holders face renewal at significantly higher interest rates each month. Borrowers with fixed rates can expect their payments to increase by an average of 14-25% next year compared to early 2022 costs, and by 20-25% in 2025 and 2026. Meanwhile, those with full variable rates have already experienced payment increases of 49% this year.
However, borrowers with variable rates and fixed monthly payments will face the most significant increases ahead, as some have been covering only interest costs, or even less. These borrowers could potentially face an average payment increase of 44% by 2026 when their mortgages reset.
Peter Routledge, head of Canada’s banking regulator, has expressed concern about this group of borrowers, who make up approximately $369 billion of the $2.1 trillion outstanding mortgage market. He stated that they are “at risk of suffering a significant payment shock” and hopes to see this option offered less frequently.
In response to the rising payments, banks and lenders have been increasing the length of amortizations to reduce monthly costs. According to the Bank of Canada, over 46% of Canadian mortgages now have payment schedules longer than 25 years, steadily rising from around 32% in summer 2020. Many of the mortgages at major Canadian banks now stretch past 30 years, with the majority extending beyond 35 years.
While extended amortizations are falling out of favor, borrowers may need to make lump sum payments or increase their monthly payments to bring their loans back in line, which is recommended by the regulator. However, finding the funds to do so could prove challenging for many, as credit markets show signs of strain.
Meaghan Hastings, CEO of The Mortgage Coach brokerage, advises borrowers who can’t manage higher payments or a lump sum to explore all available options. She notes that the mortgage stress test is pushing more borrowers into the alternative lending market. While alternative products generally come with higher costs, there are a growing number of options in this space that can provide solutions for the next 18 to 24 months.
Hastings expects some housing investors to sell off condos due to the financial strain, but overall, most homeowners will do whatever it takes to hold onto their property. Canadians, in general, are willing to make significant sacrifices to keep their homes.
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