My mortgage is coming up for renewal and I can’t afford a higher rate. What are my options?

By Clarrie FeinsteinBusiness Reporter

Every day, mortgage broker Mary Sialtsis is hearing the same question from homeowners: will I be able to afford my mortgage when I need to renew?

“It’s a big concern,” she said. “The Bank of Canada’s eight rate increases in less than a year has been historic and has had a significant impact on people being able to make their payment.”

Currently, variable rates are sitting above six per cent and five-year fixed rates are in the high four to five per cent range. That’s the harsh new reality facing the 1.1 million Canadians who will have to renew their mortgages this year.

Economists predict the Bank of Canada will begin to lower the overnight lending rate in early 2024, potentially even as early as 2023.

But the Bank of Canada won’t lower the overnight lending rate quickly. While the five-year fixed rate has already dropped in the last few weeks, it will be some time before variable rates, which move in line with the policy-rate changes, drop drastically enough to make it an attractive option, experts say.

“It doesn’t make sense for homeowners who need to renew to switch from a five-year fixed rate to variable rate at this time,” said Victor Tran, RATESDOTCA mortgage and real estate expert.

For now, fixed rates are lower than variable rates and the risk of moving to a variable rate that could remain elevated for at least another year isn’t worth it for many of his clients, he said.

“Short term fixed rates are a lot lower, by a full per cent compared to the five-year fixed,” he said. “It’s the strategy a lot of people are taking to lock into a 4.99 per cent fixed rate for two or three years and ride it out to renew into something lower instead of the five-year variable rate of six per cent and gambling if the Bank will drop the rate. The Bank won’t drop the rate as quickly as they increased it.”

Sialtsis is using a similar strategy in her practice. At the end of the day, she said, it comes down to people’s risk tolerance. After a year of instability in the real estate market, many homeowners want to choose a safer option with a short-term fixed rate.

Homeowners who have a five-year fixed mortgage rate up for renewal also need to understand the calculations, she said.

“There’s a common misconception made with many (homeowners) thinking their payments will increase by double if the rate is doubled,” Sialtsis said. “That’s not true.”

For example, if someone bought a house five years ago and had a mortgage of $500,000 with an interest rate of 2.5 per cent and 25 year amortization, their monthly payment would be around $2,240. Five years later the homeowner would have paid around $76,000 of their principal payment making their mortgage $423,000, and the new amortization would be 20 years. With the new interest rate at five per cent their mortgage payment will increase to $2,780 per month.

“It’s over $500 more a month, but it’s not double the payment,” Sialtsis said.

If paying an extra $500 is still an issue then it’s possible to refinance.

If the homeowner decides to refinance — when you renegotiate your existing mortgage loan agreement — then you can extend the amortization to lower the monthly payments. Typically legal fees are associated with refinancing, which can be around $2,000, she said.

“If we take the person who has the $423,000 mortgage and we add on $2,000 in legal fees and extend their amortization to 30 years, their monthly payment comes to $2,268,” Sialtsis said. “That’s a much more manageable monthly payment increase.”

It’s important to refinance at maturity — when the mortgage is up for renewal — because if you break the contract beforehand it will result in penalty fees.

Homeowners who have accelerated the pay of their mortgage or put in additional payments towards the principal are in a better situation to refinance, Tran said.

If more of the principal has been paid in a shorter period of time, it’s accelerated the amortization period. For example, if the initial amortization was 25 years and five years later upon renewal they’ve reduced their amortization to 15 years, they can extend their amortization to 20 years without additional costs or having to requalify.

“Every bank or lender allows this for people who have accelerated their amortization, because they’ve paid down the balance quicker than scheduled,” he said.

Homeowners approaching renewal should also shop around and start looking at mortgage rates earlier, instead of last minute, said Ian Calvert, vice-president and principal of wealth planning, at HighView Financial Group.

Typically the five major Canadian banks offer similar rates with a 0.25 per cent to 0.5 per cent difference, but right now some banks have more than a one per cent difference in their mortgage rates, Tran added.

Calvert also noted that most banks post their mortgage rates online so homeowners can do rough calculation of what their new mortgage rate will be well in advance to see if the increased cost can be absorbed.

“If you’re having to pay $500 more, you need to look at your budget and understand where you spend your money,” Calvert said.

Understanding the different categories of where you spend can make it easier to figure out what areas in your life can be scaled back, such as food and entertainment.

But for many people it will be a tough year or two ahead, experts say.

Sialtsis recently had a client who finished a one-year term with a lender that ended on Jan. 1, 2023. Their interest rate for the year had been 2.99 per cent. The lender renewed it at more than eight per cent.

“We had to refinance them and find them another lender in the 6.5 per cent range, which was a bit lower, but they still saw a significant increase to their payment and hadn’t paid down much of the principal,” she said. “People are really experiencing a cash flow crunch.”