This was an interesting statement by RBC Economics on Monday:
The truth is, virtually any interest rate increase at all (let alone one to two percentage points) will leave you paying more at renewal, all else equal. Many don't realize that.
Here’s an example that makes the point.
In this sample scenario, a 5-year fixed borrower renews their original mortgage (Mortgage 1) into a new term (Mortgage 2). Despite a mere 10-basis-point increase in her mortgage rate, and despite paying down her mortgage balance for years, she experiences higher payments. Why?
The reason is simple: Lenders keep your amortization the same when you renew.
Whether your payments rise or fall after renewing depends on the rate and amortization.
So even though you pay interest on a much smaller balance after renewal, your new payments will be higher because the rate is higher and the amortization is now five years less.
Of course, you could always refinance to increase your amortization, thus lowering your payments. But then you'd need to qualify for that refinance because it's considered a brand new mortgage. Getting approved for a new mortgage at prime mortgage rates is not always possible for people who need to lower their payments.
With decades of down-trending fixed rates, Canadians have seldom faced higher renewal rates. But in the next year or so, that could change. If you got a mortgage in 2016 or 2017, then unless you refinance, your payments could possibly increase on your next renewal.
You’ll want to plan for that by "stress testing" your mortgage using at least one percentage-point-higher rates. You can do that by: