Like many homeowners, Ian Marsden has been following what the Bank of Canada has been up to lately quite closely. He bought a house in Calgary in 2018 on a five-year, fixed rate loan, at about three per cent.
He went with a 25-year term, and because he chose an accelerated biweekly payment plan, each one of his $750 payments had him well on his way toward paying it down well ahead of schedule.
By the time his loan was up for renewal this year, he was on track to pay it off in as little as 15 more years, after making a few extra payments along the way.
The bad news, of course, was that his loan renewal was timed to coincide with the most aggressive campaign of rate hikes since the Bank of Canada started targeting inflation in the first place, taking the central bank’s rate from 0.25 per cent in February 2022 to five per cent today.
He discussed his options with his mortgage broker and, not liking the look of a lot of what he was seeing, he settled on another fixed rate loan at just under five per cent. It works out to a 26 per cent increase on what he was previously paying, though, for him, the peace of mind was worth it to lock in.
“It’s a couple grand a year more,” he told CBC News in an interview. “But I went fixed again because with the chaos, I don’t think it’s getting better any time soon.”
Millions of Canadians may be inclined to agree. According to official figures, there are currently six million residential mortgages in Canada right now, and about 1.2 million of them come up for renewal every year. About one-third of all mortgage holders have already seen their rates increase, and everyone else should expect to start paying more soon.
Mortgage broker Ron Butler says anyone with a mortgage should brace for much higher rates and payments than they were probably ever expecting. “In some cases, double the rate they were experiencing and nothing but bigger payments moving forward,” he said.
Thousands more dollars a year
The numbers add up fast. Prior to the recent rate hikes, if you were lucky, you could have signed a variable rate loan at about one per cent in January 2022. At that rate, a $400,000, 25-year mortgage would cost $1,507 a month.
If that mortgage went up in lockstep with the Bank of Canada’s hikes, by last week, that loan was sitting at 5.75 per cent and costing $2,500 a month. This week’s hike would have tacked on another $59.
Add it all up, and that’s more than $12,600 extra each year.
Lately, Butler says he hears daily from borrowers with a desperation in their voice he’s never heard before.
“We take calls from some people who are actually in tears,” he said. “They’ve got a renewal [and] they don’t know what they’re going to do.”
Butler said lenders have been delaying some of the payment shocks for many borrowers by extending amortizations. That brings relief upfront by keeping monthly payments steady, but it tacks on years to the life of the mortgage by effectively turning them into interest-only loans.
“We hear these stories about 70-year amortization, 90-year amortization — instead of paying off your mortgage, these people’s mortgages are actually getting bigger,” Butler said.
But that doesn’t work forever, as the debt has to be paid back under possibly worse terms later.
“At renewal … those rates, those payments are going to go up,” Butler said.
WATCH | Why some mortgages are getting bigger, even as you make your payments:
Kara Hishon knows that first-hand. She lives in Stratford, Ont., with her husband and three children. They bought their family home in the summer of 2018 on a fixed-rate loan at 2.8 per cent, which kept the payments well within their budget. While they love everything about their home, the same can’t be said of the loan options she’s been presented with now that their five-year term is up.
Hishon says she’s shopped around, but rates from other lenders are all about double her current rate, so she’s leaning toward re-upping with her existing lender, at 5.75 per cent.
That’s going to add about $400 a month to their mortgage costs — and comes with another catch: In order to keep the payments comparable, they’ve had to undo the diligent work they’ve done to get their original loan down to 16 years, and re-amortize at 30 years.
“It’s kind of a bummer to have to forego that,” she said in an interview, “but there’s no way we could have done it otherwise.”
The loan has one more unconventional wrinkle to it in that it is for a three-year term, as the Hishon family is hopeful of being able to renegotiate on better terms then.
There’s a lot of that sort of sentiment out there. Typically, fixed rate loans are the most popular option for buyers, especially first-time buyers. But the Bank of Canada’s decision to slash interest rates to near-zero during the pandemic caused many to flock to variable rate ones.
Personal finance author Preet Banerjee says variable loans typically have lower rates than fixed ones because of the peace of mind that comes from locking in.
“A lot of people will actually put a premium on predictability, and that’s normally what you’re paying for with a fixed rate,” he said. “But that premium between variable versus fixed rates, it’s upside down right now,” which is why more and more people are choosing the peace of mind of predictable fixed rates, but for a shorter period so they get to try for a better deal once things inevitably settle down.
While there is no magic bullet that’s going to bring borrowing rates down to the levels seen from 2020 to 2022, Banerjee’s advice to those renewing is to make sure you do your homework, seek the help of a 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 exactly that.
She lives in Toronto with her brother and retired parents, and as the main earner in the family, she took it upon herself to start shopping around earlier this year for a new loan on the house they bought in 2019.
She has a few more weeks before renewal, but she knows the four-year term at 2.79 per cent she got last time won’t exist, and she may be facing a rate that starts with a five, six — or more.
“The rate will be more than double, so my monthly payment will increase at least $600 to $1,000 per month,” she said.
As an engineer, he knows he has a higher income than most, but he and his brother have to cut expenses and try to make money on the side to keep the roof over their heads.
“It’s still tight,” she said. “My salary doesn’t increase based on inflation.”
She’s resigned to signing up for the best deal she can find when her loan is up later this summer, and while she says she has no option but to make it work, she’s questioning why people like her are having to pay the price to bring down inflation for everyone.
“The rich get richer and everybody else gets poorer,” she said. “It’s not sustainable.”