Nearly half of the mortgages in force in Canada will need to be renewed over the next two years. If the prospect of an upcoming drop in interest rates gives hope for a little respite, your monthly bill could still increase by several hundred dollars. State of play.
“We expect the Bank of Canada to start lowering rates this year, but people will still pay higher monthly payments when renewing their mortgage because the rates will still be higher than they were. “were before and during the pandemic,” says Seamus Benwell, senior research specialist at Canada Mortgage and Housing Corporation (CMHC).
According to CMHC estimates, approximately 2.2 million mortgage loans in force will need to be renewed this year and next, which represents approximately 45% of mortgage loans in force.
So how much will the bill increase? Let’s take the example of a $400,000 mortgage loan taken out during the pandemic, at a fixed rate of 2.5% over a 3-year term and repaid over 25 years. The monthly payments for such a loan currently amount to approximately $1,792.
After three years, when it comes time to renew, you must subtract the principal amount repaid — in this case approximately $35,950 — from the original mortgage loan. If we renew this mortgage loan at a rate of 5%, the new monthly payments amount to $2,266.
Thus, the bill for repaying this loan increases by $474 per month, the equivalent of $5,690 more per year.
Consolidate your debt, extend amortization
Until now, Canadians who have a mortgage loan are still able to repay them. CMHC data on rates of overdue accounts, where payments are at least 90 days late, bears this out. The delinquency rate for mortgages has remained stable since before the pandemic and has even decreased slightly.
John Fucale, senior vice-president of broker relations at Multi-Prêts mortgage, believes that the implementation of the stress test to qualify for a mortgage loan helped prepare Canadians for rising interest rates.
The financial pressure is no less real, he admits. Especially when you have other debts, such as a student loan or a line of credit, whose interest rates are at higher levels than those of a mortgage loan.
In this case, debt consolidation — which consists of grouping all your debts under a single loan — can be an option to reduce your total repayment bill, suggests Mr. Fucale.
Another possibility: extending the amortization period of your mortgage loan to limit the increase in your monthly payments.
But since each situation is case by case, Sylvain Poirier, of the Association of Mortgage Brokers, suggests calling on a professional to study your situation.
“The financial institutions themselves will contact their customers to find solutions. This is why the failures are not huge. They prefer to come to an agreement with their clients rather than take over a property, because there is a huge cost associated with that. There are legal fees, monthly payments that are not paid, maintenance and snow removal of the property that are not done…” summarizes Mr. Poirier.
The variable rate has lost a lot of feathers
When the time comes to renew your mortgage loan, two questions arise: choose a variable rate or a fixed rate? And for what term: 1 year, 3 years, 5 years?
At the heart of the pandemic, when the Bank of Canada’s key rate — which influences interest rates in the country — was at a low of 0.25%, the variable rate gained popularity. In 2022, more than half of mortgage loans granted were at variable rates, according to CMHC data.
With the sharp rise in interest rates, the popularity of variable rate loans fell and fixed rate loans have largely regained popularity.
“We must always look at the needs, in the short to medium and long term, of customers,” argues Mr. Fucale. “For example, a couple who buys a property, but are perhaps expecting a baby, they may not be able to wait five years before changing accommodation, so they may take a shorter term” , he illustrates.
Furthermore, if the Bank of Canada must begin to lower rates this year, the timing of this reduction remains uncertain and the magnitude of the rate reduction also remains unknown, notes Mr. Poirier.