Homeowners and prospective homebuyers are increasingly feeling the pinch of Bank of Canada’s interest rate hikes. Homeowners who are renewing their fixed- or variable-rate mortgages will likely see a higher rate upon renewal – double the interest rate that they locked in their mortgages at.
According to a Leger survey, conducted on behalf of RATESDOTCA and BNN Bloomberg, 62% of homeowners are concerned about higher payments when their mortgage comes up for renewal. This marks a 9% increase from the same survey conducted last year, when only 53% of homeowners voiced their concern over higher payments upon renewal.
The recent survey also found that homeowners within the age groups of 18 to 34 and 35 to 54 are more likely to be concerned about upcoming mortgage renewals. Fifty-six per cent of homeowners have a plan to deal with the increase in monthly mortgage payments, while one-in-five (17%) don’t currently have a plan in place.
Since last year, there has been an increase in concern over increased mortgage payments
Historically, most Canadian homeowners have opted to hold a five-year mortgage. If a homeowner signed on a variable-rate mortgage at 3% in 2018, they might now expect to pay around 6.05% on their mortgage payments – the highest it's been in the past 16 years.
This translates into an additional $200 per month, or $2,400 per year.
It’s no surprise then, that Canadian homeowners are feeling increasingly concerned about their ability to make these monthly mortgage payments. Since last October, there has been a 9% surge in respondents who confessed concern about higher mortgage payments upon renewal – 53% of homeowners admitted that they were concerned last year and now 62% are concerned about their mortgage payments.
Breaking it down further, 31% said they were very concerned about higher mortgage rates, which is a 19% increase from last year. On the other hand, mortgage holders who are not concerned about renewals has decreased from the previous year from 44% to 35%.
Perhaps unsurprisingly, younger homeowners are more likely to be concerned about higher mortgage payments. Seventy-three per cent of those in the age group of 18 to 34 are concerned about increased mortgage payments and 69% of those are in the age group of 35 to 54. Forty-seven per cent of those who stated that they’re not concerned about increased mortgage payments are from the age demographic of 55 and older.
More than half of homeowners have a plan for increased mortgage payments
The survey found that 56% of homeowners have a plan in place to cover these increased mortgage payments, 14% don’t really need a plan because they can easily afford the increase, and 21% don’t have a plan.
Among those who responded to having a plan, 39% plan on decreasing spending on other areas, 9% plan on dipping into their savings, 5% intend on taking out a loan, and another 3% plan on selling their house.
Victor Tran, a mortgage expert at RATESDOTCA says that this additional expense means that a car down payment, a few grocery runs, or vacation must now be redirected towards mortgage payments. Otherwise, people would have to dip into their savings to cover this amount or find other ways to pay it off.
The people who reported having a plan comprised young homeowners in the age group of 18 to 34 (66%) and 35 to 54 (63%) and those concerned about increased payments (73%). Quite strikingly, there is also an increase in the number of people who plan to take on debt to cover their mortgage payments (5% now versus 2% last year).
Twenty-nine per cent are not concerned with higher payments and 21% don’t have a plan. Even among those concerned with increased mortgage payments, one-in-five (17%) don’t have a plan.
Those that don’t need a plan because they can easily afford the increase belong to the age group of 55 and above.
Be proactive, and shop around
Tran advises homeowners to take a proactive approach, rather than a reactive one, and renew their mortgages before the renewal date.
“Most people wait until a month or two before their mortgage renewal date to speak with their mortgage lender,” he explains. “But that might be too late. By then, the rate may be higher and it’s not enough time to switch lenders.”
You need a minimum of four to five weeks to switch lenders, and hence, he advises homeowners to start making a plan to reduce their mortgage payments four months ahead of their renewal date. You can notify your lender to confirm an effective renewal date to avoid incurring a penalty fee if you break your contract before renewal. Doing so before an upcoming Bank of Canada announcement could protect you in the event of a rate hike.
“There are no costs or fees associated with speaking with a mortgage broker,” he says. “Start consulting with a broker and lock in a rate as soon as possible.”
But not every lender may allow you to put in an effective renewal date and lock in a favourable rate. That’s why you should always shop around for a better term and rate with mortgage lenders. According to Tran, most homeowners will likely stay with their current lender – even if that means a higher rate – than go through the cumbersome process of applying with a new lender, credit check, and a stress test. That’s a major missed opportunity to keep your monthly payments down.
“Even a 0.1% or 0.2% difference can really add up on mortgage payments and interest paid over the term of your mortgage,” he says.
“In the current inflationary and high interest rate environment that we’re seeing, it’s important now, more than ever, to shop around for a better mortgage rate.”
Answers will only be used for editorial purposes.
An online survey of 1,517 Canadians (older than 18 years) was completed between July 21 and 23, 2023, using Leger’s online panel. No margin of error can be associated with a non-probability sample (i.e., a web panel in this case). For comparative purposes, though, a probability sample of 1,517 respondents would have a margin error of ±2.5%, 19 times out of 20.
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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
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