Renewing at a higher rate? Here’s what your mortgage could cost

Summary

Canadian homeowners are bracing for a significant increase in mortgage payments as nearly half of all mortgages, around 2.2 million loans, are up for renewal with much higher interest rates. This is due to rates that were near zero a few years ago now reaching 5%. For example, a $315,000 mortgage at 1.9% will see monthly payments jump from $1,300 to nearly $2,000 at 5.8%. Strategies to mitigate the impact include extending amortization periods, though this results in higher long-term costs. Many Canadians are expected to adapt by cutting spending, but the financial pressure is palpable, with some struggling to make ends meet despite low delinquency rates.

Takeaways

• 🏠 **Mortgage Renewals**: Half of Canadian mortgages, around 2.2 million loans, are up for renewal with significantly higher rates.
• 📈 **Interest Rate Hike**: The Bank of Canada's key lending rate has risen from nearly 0% to 5%, the fastest series in the country's history.
• 💸 **Increased Payments**: For a $315,000 mortgage, monthly payments could jump from $1,300 to nearly $2,000, an extra $665 per month.
• 🚨 **Higher Burden in Major Cities**: In cities like Toronto and Vancouver, where homes are more expensive, the impact is even greater.
• 🏡 **Expensive Homes**: A common mortgage of $600,000 would see payments rise from $2,523 to nearly $3,800 per month, a $1,300 increase.
• 🤔 **Financial Pressure**: Many homeowners are bracing for tighter financial situations and may need to make hard decisions about spending.
• 💡 **Savings Buffer**: Many Canadians saved during the pandemic, providing a buffer against increased mortgage payments.
• 📉 **Amortization Strategy**: Extending the amortization period can reduce monthly payments but increases the total amount paid over the life of the loan.
• 🏢 **Economic Outlook**: Economists suggest holding off on selling homes due to high rents and new house prices, and rates may stabilize or decrease later in the year.
• 📊 **Prioritizing Payments**: Despite higher interest rates, mortgage delinquencies are low, indicating Canadians are prioritizing mortgage payments.

Q & A

How many Canadian mortgages are expected to be up for renewal in the next two years?

Close to half of Canadian mortgages, which is approximately 2.2 million loans.

What is the reason behind the increase in mortgage renewal costs?

Mortgages that were locked in at low interest rates three to five years ago are now up for renewal with much higher rates due to the fastest series of rate hikes in the country's history.

What was the Bank of Canada's key lending rate a few years ago, and what is it now?

The Bank of Canada's key lending rate went from almost 0% to 5%.

How much is the monthly payment expected to increase for a $315,000 mortgage with a renewal rate of 5.8%?

The monthly payment is expected to jump from just over $1,300 to close to $2,000, which is an extra $665 each month.

What is the common mortgage amount in cities like Toronto and Vancouver?

It is common to have a $600,000 mortgage in cities like Toronto and Vancouver.

What would be the expected monthly payment for a $600,000 mortgage if renewed at today's rate?

The household should be prepared to pay close to $3,800 a month for a 5-year fixed term, which is close to $1,300 higher than before.

What advice does Brian Yu, the chief Economist with Vancouver's Central One Credit Union, give to homeowners facing mortgage renewals?

Brian Yu suggests that homeowners facing renewal should plan ahead and brace for tighter financial situations.

What are some of the lifestyle changes Canadians might have to consider to afford higher mortgage payments?

Canadians might have to consider reducing savings, taking fewer or cheaper vacations, going down to one vehicle, putting off big purchases, and buying cheaper products.

What is one strategy homeowners can use to reduce their mortgage payments when renewing?

Borrowers are choosing longer amortization periods, which means the mortgage is paid off over a longer period, resulting in smaller payments but more interest paid in the long run.

How much would the monthly payment increase if the amortization period for a $600,000 mortgage is extended by 5 years?

The monthly payment would increase by approximately $900 instead of close to $1,300.

What is the current trend in mortgage delinquencies despite higher interest rates?

Despite higher interest rates, delinquencies are at historic lows, indicating that Canadians are prioritizing mortgage payments over other expenses.

What is the economic outlook for mortgage holders according to the script?

There are signs that the Bank of Canada may keep rates steady or even start cutting them later in the year, which may provide some relief for mortgage holders.