Extend a mortgage this year? Here’s what the latest interest rate hike means for you
Like many homeowners, Ian Marsden has been following closely what the Bank of Canada has been up to lately. He bought a house in Calgary in 2018 on a five-year loan with a fixed interest rate of about three percent.
He went with a 25-year term, and because he opted for an accelerated bi-weekly payment plan, he was well on his way to paying it off well ahead of schedule with each of his $750 payments.
By the time his loan came up for renewal this year, he was on track to pay it off in less than 15 years, having made a few extra payments along the way.
The bad news, of course, was that his loan renewal coincided with the most aggressive campaign of rate hikes since the Bank of Canada began focusing primarily on inflation, raising the central bank’s rate from 0.25 percent in February 2022 to five percent today.
He discussed his options with his mortgage broker, and since much of what he saw didn’t look good, he took out another fixed-rate loan at just under five percent. It amounts to a 26 percent increase over what he previously paid, but for him, the peace of mind was worth holding on to.
“It’s a few thousand a year more,” he told CBC News in an interview. “But I’m fixed again because with the chaos I don’t think it will get better anytime soon.”
Millions of Canadians might be inclined to agree. According to official figures, there are currently six million residential mortgages in Canada, and about 1.2 million of those are due for renewal each year. About a third of all mortgage holders have already seen their rates rise, and everyone else should expect to pay more soon.
Mortgage broker Ron Butler says anyone with a mortgage should brace themselves for much higher rates and payments than they probably ever expected. “In some cases, they double the rate they experienced and nothing but larger payments up front,” he said.
Thousands of dollars more per year
The numbers add up quickly. Prior to the recent rate hikes, if you were lucky, you could have taken out a floating rate loan of about one percent in January 2022. At that rate, a $400,000, 25-year mortgage would cost $1,507 per month.
If that mortgage went up along with the Bank of Canada increases, that loan sat at 5.75 percent last week and cost $2,500 a month. This week’s increase would have brought another $59.
Add it all up and that’s over $12,600 extra per year.
Lately, Butler says he hears from borrowers daily with a desperation in their voices he’s never heard before.
“We’re taking calls from some people who are really in tears,” he said. “They have an extension [and] they don’t know what they’re going to do.”
Butler said lenders postponed some of the payment shock for many borrowers by extending write-offs. That provides upfront relief by keeping monthly payments stable, but it extends the life of the mortgage by essentially converting them into interest-only loans.
“We hear these stories about 70 years of amortization, 90 years of amortization — instead of paying off your mortgage, these people’s mortgages are actually getting bigger,” Butler said.
But that doesn’t work forever, because the debt has to be repaid later on potentially worse terms.
“At renewal…those rates, those payments go up,” Butler said.
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Kara Hishon knows that first hand. She lives in Stratford, Ontario, with her husband and three children. They bought their family home in the summer of 2018 with a fixed-interest loan of 2.8 percent, keeping the payments well within their budget. While they love everything about their home, the same can’t be said for the loan options she’s been given now that their five-year term is up.
Hishon says she’s looked around, but other lenders’ rates are all about double her current rate, so she’s leaning toward paying again at her existing lender, which is 5.75 percent.
That will add about $400 a month to their mortgage costs — and comes with another catch: To keep payments comparable, they had to undo the hard work they did to reduce their original loan to 16 years. , and depreciate again in 30 years.
“It’s a bit of a shame to have to part with that,” she said in an interview, “but we couldn’t have done it any other way.”
The loan has another unconventional wrinkle because it has a three-year term, as the Hishon family hopes they can then renegotiate better terms.
There’s a lot of that kind of sentiment. Typically, fixed-rate loans are the most popular option for buyers, especially first-time buyers. But the Bank of Canada’s decision to cut interest rates to near zero during the pandemic caused many to move en masse to variable interest rates.
Personal finance author Preet Banerjee says variable loans typically have lower rates than fixed ones because of the peace of mind that comes from lockdown.
“A lot of people value predictability, and you normally pay for that with a flat rate,” he said. “But that premium between variable vs. fixed rates, it’s now turned upside down”, which is why more and more people are choosing the peace of mind of predictable fixed rates, but for a shorter period of time, so they can try a better deal once things inevitably come to rest.
While there is no panacea that will bring loan rates down to 2020 to 2022 levels, Banerjee advises those renewing to make sure you do your homework, enlist the help of a broker and don’t blindly sign the agreement. renewal notice that your lender sends you.
“The sooner you start looking at your options, the better.”
Leticia Lam did just that.
She lives in Toronto with her brother and retired parents, and as the family’s main earner, she took it upon herself to start shopping earlier this year for a new loan for the house they bought in 2019.
She still has a few weeks before her renewal, but she knows that the four-year term of 2.79 percent she got last time won’t exist, and she may face a rate that starts with a five , six or more.
“The rate will more than double, so my monthly payment will increase at least $600 to $1,000 each month,” she said.
As an engineer, she knows she has a higher income than most, but she and her brother have had to cut back and try to earn extra money to keep a roof over their heads.
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“It’s still tight,” she said. “My salary does not increase based on inflation.”
She’s resigned to signing up for the best deal she can find when her loan ends later this summer, and while she says she has no choice but to make it work, she wonders why people as they must pay the price of inflation for all
“The rich get richer and everyone else gets poorer,” she said. “It’s not sustainable.”
