2024 to be a significant year for mortgage renewals
If there’s one topic that’s top of mind for borrowers and brokers alike in 2024, it’s mortgage renewals. It’s widely understood that those who need to renew their mortgage term contracts this year are likely to face some challenges.
The fact is, today’s borrowing environment is wildly different than when many of these mortgage holders first qualified for their home loans. Both fixed and variable mortgage rates have increased drastically since the early months of 2022, when the Bank of Canada kicked off one of its most aggressive hiking cycles in history. In February of that year, the benchmark overnight lending rate in Canada sat at a pandemic low of 0.25%, setting the stage for mortgage rates near or below 1%. Twenty-two months later, and that key rate has soared to 5%, resulting in a Prime rate of 7.2%.
Bond yields have also been on a – mostly upward – rollercoaster over this time frame, hitting a high of 4.42% in October; again, up dramatically from March 2022’s low of 1.46%. Overall, Canada’s five-year government bond has averaged a yield of 3.3% over the course of the BoC’s hiking cycle.
As a result of all this, today’s lowest five-year variable mortgage rate is close to 6%, and the lowest fixed-rate option sits just under 5%. If you were a borrower who originally took your mortgage out five years ago in 2019, that means you’re looking at an increase this year of 170 and 359 basis points, respectively. That chasm will widen for the 2020 and 2021 borrowers who got their rates at the absolute bottom of the cycle, and are coming up for renewal over the next two years.
The effects of the BoC’s hiking cycle has already been significant; according to Q3 debt repayment data released by Statistics Canada, mortgage interest payments have soared by nearly 90% since March 2022, while the amount borrowers are putting toward their principal loan has shrunk by 16.8%.
Also read: The mortgage renewal process
How many mortgage borrowers are coming up for renewal in 2024?
A considerable chunk of Canadian borrowers stand to be impacted. According to analysts, it’s anticipated about $251 billion of mortgages will come up for renewal in 2024, followed by another $352 billion in 2025.
According to December data from the Bank of Canada, 80% of all mortgages outstanding as of February 2022 will experience a payment increase by 2024, with “virtually all” remaining mortgages to go through their renewal cycle by 2026. Depending on the path for interest rates, these borrowers “may face significantly higher payments,” states the Bank.
“Since March 2022, interest rates have risen considerably and rapidly following a period of historical low rates during the first two years of the COVID‑19 pandemic,” reads the report. “As a result, many mortgage holders are currently facing significantly higher payments, and others will do so at renewal. The exact size of this increase in payments depends on the features of each mortgage and how interest rates continue to evolve.”
How much will mortgage payments increase?
The BoC crunched some numbers to see just how much more borrowers can expect to pay. Using a scenario that assumes interest rates will “evolve according to financial market expectations,” and that borrowers will renew into the same type of mortgage, the BoC projects all outstanding mortgages as a whole will see a median monthly payment increase of 34% by the end of 2027, from $1,200 in February 2022, to $1,600.
But the payment pain will vary depending on the type of mortgage borrowers have:
- Fixed-rate borrowers with a term of five years or more would see payments increase by 25%, from $1,152 to $1,444.
- Fixed-rate borrowers with terms of less than five years would see payments increase by 38%, to $1,532 from $1,109.
- Variable-rate mortgage borrowers with a variable payment schedule have already absorbed a 70% increase, notes the BoC, as their payments fluctuate directly alongside the benchmark rate. However, they can expect another 43% difference at renewal time, changing their payment from $1,902 to $1,327.
- However, it’s variable-rate borrowers on a fixed payment schedule (VFM) who are set to absorb the greatest increase – up 54%, blowing their monthly payment up to $2,190, from $1,418.
“For this group, median payments are expected to increase by 54% during the period between the end of February 2022, just before interest rates began to increase, and the end of 2027,” writes the Bank. “In contrast, those with variable payments have already been impacted, with median payments up 70% in November 2023 compared with their level at the end of February 2022.”
“Triggered” borrowers set for larger renewal shocks
VFM borrowers were also subjected to one of the nastiest side effects of the rapid pace of the central bank’s rate hikes – hitting their trigger rate (the point the mortgage’s interest payment equals that of its principal payment.)
This has been the case for as much as 80% of VFM borrowers by November 2023, says the Bank, likely prompting many of these borrowers to take action such making a prepayment, or converting to a fixed-rate mortgage.
However, according to the Bank, as many as a quarter of VFM borrowers have hit the more serious trigger point, meaning their mortgage payment must increase in order to cover their interest. While some lenders require borrowers to increase their payments immediately when hitting their trigger point, others have offered solutions such as temporarily extending the mortgage’s amortization, or adding the interest onto the principal balance of the loan. This means the mortgage is growing in size over time, rather than being paid down (referred to as negative amortization).
“Many VFMs are currently in a situation of negative amortization; as a result, their loan balances are growing. Unlike a variable payment arrangement in which the payment always adjusts with the interest rate, these mortgages will face a larger increase in payments at renewal to get back to their original amortization schedule. Ultimately, they will end up costing more in interest over the life of the loan,” writes the Bank.
Rate hikes, rising incomes, to ease payment pain
There is some relief on the horizon, however; markets and analysts are now anticipating the BoC could start cutting rates this year, perhaps as early as April. Roughly 200 basis points of cuts are expected over the course of this year and next, which would bring the Prime rate down to a more manageable 5.2%, easing variable mortgage rates in tandem. Expectations of a friendlier interest rate environment have also encouraged bond investors; yields have eased to the lower 3% threshold in the first few weeks of the year, and a number of lenders have already lowered their fixed-rate offerings.
As the BoC itself states, based on market rate expectations, payments are expected to decline starting in mid-2024.
The BoC also factors in that many borrowers will likely see their incomes increase over the next few years, which will take some of the financial pressure off renewing at a higher mortgage rate.
“The impact of higher interest rates on borrowers’ ability to pay their mortgage will largely depend on their future income,” the report states. “Without any income growth, the median borrower may need to dedicate up to 4% more of their pre-tax income to mortgage payments by the end of 2027. However, for some borrowers, income growth could mitigate the impact of higher interest rates on debt serviceability.”
The Bank also notes that its analysis doesn’t account for changes in borrowers’ behaviour that could also reduce the renewal impact, such as making accelerated payments, or switching to a lender offering a lower mortgage rate.
“Such changes would help lessen (although not avoid) the increase in payments. Thus, our simulation results represent an upper-bound estimate,” the Bank writes.
How to reduce the impact at mortgage renewal time
While a boost in income would certainly be a welcome solution for many Canadians, there are fortunately other ways to prepare for mortgage renewal time than simply making more money.
1: Get in touch with your mortgage broker – sooner rather than later
Don’t try to navigate your renewal alone – it’s always best to have a professional in your corner. Mortgage brokers have an intimate knowledge of the mortgage industry, with insights into the most competitive products and features available from a number of lenders – including alternative options if need be.
2: Start the renewal process early
If you do think you’ll make a lender change at renewal time, don’t wait around for the notice that your term is up. Most lenders will allow the renewal process to start a full 120 days before your term expires – and in today’s economic climate, time is money. Kicking off your renewal rate search early gives you more time to shop for the best product, or to learn enough about your options to effectively negotiate with your existing lender.
However, borrowers making the switch at renewal – with the exception of those with high-ratio, transactionally-insured mortgages – can expect to be stress tested. Depending on the rate you originally got, this could mean qualifying at a higher threshold. A borrower today taking out a five-year fixed rate of 4.89% would be stress tested at 6.89%. You may have been previously stress tested in a much lower range – or not at all.
3: Consider a refinance
If you’ve built up equity in your home, that could come in handy now to offset the impact of higher monthly mortgage payments, or restructure your total debt load to make it more manageable.
There are a number of ways to access increased cash flow, such as taking out a HELOC, which allows you to access up to 65% of the value of your home. You could also consider a “blend and extend” mortgage, which takes your existing, lower mortgage rate and combines it with new funds taken out at current market rates; while less competitive than the best rates available on the market, this could be an option for some borrowers who anticipate having to renew considerably higher.
4 - Keep your fixed-rate options open by going variable
Both fixed and variable mortgage rates are expected to drop within the coming months, but it’s unclear which rate type will decrease more; while BoC rate cuts are looking increasingly baked in over a set 24-month horizon, the fixed-rate mortgage market is much more fluid, and prices can turn on a dime.
It’s a possibility that fixed mortgage rates could fall materially lower than variable rates over the next two years – but that doesn’t help borrowers who are set to lock into a new fixed term now.
One strategy for these borrowers is to take out a variable mortgage rate at renewal instead, which grants them greater flexibility to make a change should rates drop in the future. This is because breaking a variable mortgage mid-term comes with a much lower penalty – just three month’s worth of interest – than that of a fixed-rate mortgage. As well, most lenders will allow variable borrowers to convert to their posted fixed-rate option at any time without penalty. Be sure to discuss the pros and cons of this approach with your mortgage broker to determine whether it’s a good fit for your personal risk tolerance and budget.
5 - Take out a shorter-term fixed rate
For borrowers who prefer to lock in, but still want the flexibility to take advantage of potentially lower future rates, a two- or three-year term fixed-rate mortgage could be a solution. While the rates for these mortgages are always higher than their five-year counterparts, the higher payments could be offset at renewal time should rates be materially lower. In the meantime, borrowers can ride out any short-term volatility.
6 - Lengthen your mortgage’s amortization at renewal
Extending your overall mortgage amortization period essentially spreads your payments out over a longer time period, lowering the amount you’ll pay on a monthly basis. This can be a way to mitigate the impact if renewing with a higher mortgage rate – but beware the increase in total interest paid over time. According to numbers crunched by Ratehub.ca, extending a $500,000 mortgage at a rate of 5.8% from 25 years to 30 years would reduce the monthly payment to $2,935 from $3,161 – a difference of $226. However, the interest paid would skyrocket by over $100,000 by the end of the mortgage.
The bottom line
The past several years have been very volatile in terms of the mortgage market and overall economy, and that’s put borrowers through the wringer. While 2024 appears poised to usher in a period of rate stability and relief, that is heavily dependent on economic factors such as inflation, the labour market, as well as external factors such as geopolitical tensions and trade. Simply put: when it comes to mortgage rates, no one quite knows for sure what the coming months will bring. It’s the best course of action for any borrower coming up for a rate change to work closely with a mortgage professional to ensure they’re getting the most competitive rate, and the support they need to financially weather the economic storm.
Penelope Graham, Director of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.