There’s no doubt about it – those coming up for a mortgage renewal this year are likely going to feel some financial pain.
Mortgage rates – both fixed and variable – have soared over the past 12 months, as monetary policy makers have had to increase the benchmark cost of borrowing to counter rising inflation.
Overall, the Bank of Canada has increased its overnight lending rate – which lenders use to set their Prime and variable-rate pricing – a historic eight times between March 2022 and January 2023, from 0.25% to 4.5% today. That has resulted in a Prime rate of 6.7%, and a dramatically tougher borrowing environment; the best five-year variable mortgage rate today is 5.55%, compared to the 0.9% available in the first months of 2022.
That’s considerably increased how much variable-rate borrowers are paying on a monthly basis; according to Ratehub’s calculations, a homeowner who put 10% down on a $748,450 home (the national average) in January 2022 at a five-year variable rate of 0.9%, would have had a monthly mortgage payment of $2,585 at the time. Following the BoC's rate hikes, their monthly payment would now be $4,099, translating to an additional $1,514 paid per month on their mortgage – or a total of $18,168 over its total amortization. That represents a 59% increase.
There hasn’t been much solace for those who’ve locked into fixed rates, either. Soaring bond yields pushed those rates steadily higher in 2022, a trend that’s continued into the new year; today’s lowest five-year fixed rate is 4.69%, compared to 2.99% five years ago. That means those coming up for renewal this year are facing rates nearly 2% higher.
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For many, that’s a significant difference to financially absorb – and roughly 1.1 million Canadians will be facing this scenario as their mortgages come up for renewal this year, according to the Bank of Canada. Of them, about a third are variable-rate holders.
The good news is, those renewing their mortgage do have a few options to minimize the impact of today’s higher rates. Let’s take a look.
1: Get in touch with your mortgage broker early
First of all, you don’t have to navigate your mortgage renewal alone. In today’s volatile economic climate, the factors impacting mortgage pricing can shift quickly – it’s important to have professional guidance from someone who intimately knows the mortgage industry.
Mortgage brokers aren’t just a great help when applying for a new mortgage -- they are also instrumental at renewal time, given their insights into the products and features available from a wide variety of lenders, including alt-A, B, and private mortgage options. The sooner you reach out to your mortgage pro prior to renewal with your concerns, the sooner they can create a strategy to find the best product and features to fit your specific financial situation.
In fact, if you’re looking to switch lenders or mortgage products, it’s good practice to start the search 120 days out prior to your mortgage renewal. This is the earliest date most lenders will allow the renewal process to begin, meaning you may be able to renew early for a more advantageous product, or at least understand your options, which puts you in a better position to negotiate with your existing lender.
It’s also important to be aware that borrowers switching lenders at renewal will also be stress tested anew, at a rate that may be much higher than when they first qualified for their mortgage; A borrower today with a five-year fixed rate of 5.37% (the average offered by the Big Five Banks), would be stress tested at 7.37%. Depending on when you took out your original mortgage, you may have been previously stress tested at 4.79% or 5.25% – or not at all.
2: Consider shorter-term fixed rates
As the BoC’s rate hiking cycle revved up, an increasingly popular strategy has been for borrowers to take out a fixed mortgage rate with a shorter two- or three-year term. While these rates are still priced higher than five-year terms (today’s lowest three-year fixed option is 5.59%), that’s still slightly lower than the lowest five-year variable at 5.55%. Borrowers can lock in in the hopes they’ll ride out any short-term market volatility and that the rate environment will be lower come renewal time.
While no analyst can say definitively that this will be the case, there have been strong signals from the Bank of Canada that inflation will indeed trend lower this year and next, which would take pressure off bonds and fixed rates. This can be a solution for borrowers who can carry today’s higher rates, but are looking to limit their exposure to the changing market while keeping their options open.
3: Extend your amortization schedule
If your mortgage payments are set to increase significantly at renewal, another potential option is to extend your mortgage’s amortization period. This is the total length of time it takes to pay down your mortgage in full, made up of your consecutive mortgage terms. (For example, a 25-year amortization is typically paid down over five five-year terms).
Switching to a longer amortization reduces the amount you’ll be paying monthly by spreading your payments and balance out over a longer horizon, which can make them more manageable. For example, a $500,000 mortgage amortized over 25 years requires a principal payment of $1,667 per month. Extending the amortization period to 30 years reduces that commitment to $1,389.
However, there are some important considerations; not only will it take longer to pay down your mortgage, you’ll also build your equity more slowly, and will pay more in interest over the long run.
4: Refinance at renewal
Refinancing your mortgage can be an effective way to restructure your debt load, or even access the equity in your home to help with your higher mortgage costs and pay down other debts.
Depending on how much of your mortgage you’ve already paid off, you could potentially access up to 80% of your home’s value via a number of methods including breaking your mortgage, taking on a home equity line of credit (HELOC) or blending and extending your mortgage with your current lender, which is a combination of your existing mortgage rate and any additional funds you borrow at current market rates. This can be another way to access cash flow, but be aware that blended rates are almost always higher than the best rates available on the market.
Refinancing your mortgage may also enable you to consolidate your higher-interest debt and pay a lower rate, or change your rate type. However, any associated penalties that come with breaking your mortgage may outweigh the benefits – again, it’s a good idea to consult with a pro about your options.
5: Explore alternative mortgage options
While the most competitive mortgage rates are generally offered by “A” or Prime lenders, those that work in the alternative space may be able to offer borrowers more customized solutions in regards to maximum amortizations or debt ratios, which could be a help if your financial situation has changed over the course of your mortgage term.
While an alternative lender-provided mortgage rate will be typically higher than Prime-based ones, easing other qualification requirements may help make payments more manageable. As always, it’s important to discuss with your brokerage whether this route is right for you.
The bottom line
Mortgage borrowers can expect considerable volatility in the marketplace in the next few years to come. While the Bank of Canada has indicated it will hold its trend-setting interest rate for the remainder of 2023, it’s unlikely borrowers will see rates come down until there’s significant progress on the inflation front.
Those looking to renew their mortgage, switch lenders, or take out a new mortgage, should be aware that rate scenarios may change quickly, and work with a mortgage professional to find the right solution for their specific financial circumstance.