Homeowners who negotiated mortgages back in 2020 at an interest rate of less than 2% will need to renew soon, and the days of those ultra low rates are gone as the Canadian economy experiences some unexpected changes. If you’re feeling overwhelmed about the prospect of higher payments, here’s what you need to know.
How has the market changed?
“It’s definitely been an interesting few years since rates bottomed out in 2020—the lowest five-year fixed rate we had at that point was about 1.3%, which was record-breaking unbelievable,” says Steven Levine, a certified mortgage broker with Team Levine in Montreal, Quebec.
According to Levine, rates have gone up over the past 18 months or so, and before the most recent interest rate announcement on March 6, most five-year-fixed rates are at about 4.8%. That’s a steep increase in payments.
“For a $500,000 mortgage with a 1.5% rate on a five-year fixed, the monthly payment with a 25-year amortization was $1,998,” notes Levine. “If we go up to 5%, that payment would now be $2,908. That’s an additional $12,000 a year of after-tax dollars.”
Can you extend your current mortgage term?
If you were hoping to extend your current mortgage using the same terms, you’re likely out of luck, notes Levine.
“The bank won’t be that nice because they’d be losing a lot of money,” he explains. “Interest rates are based on bond yields and if they’ve gone up, the cost of those funds has gone up. Now that your mortgage is coming up for maturity, the bank will say your old term is complete and you’ll get another term and rate based on today’s market conditions.”
Can you change your lender?
Homeowners are free to shop around for a new lender in search of a better rate or term, and would only be charged a penalty if cancelling their current contract early, says Levine.
“You can either renew with your current bank or approach someone else and see what their options are,” he says.
If you’re curious, you can find out what your penalty would be to cancel the contract early, and compare that to how much money you might save by switching lenders. In some cases, it could be worth it in the long run. In some cases, your current lender may offer you a friendlier deal to keep your business and it’s also not unusual for lenders to offer to help pay for a portion or all of your penalty, but this is a case-by-case basis so don’t forget to ask!
Will you get a sweeter deal from a new bank seeking to draw in your business? Maybe, but you’ll have better luck going through a mortgage broker, says Levine.
“The negotiating power wouldn’t be the same,” he explains. “Generally speaking, when a client goes to a bank with a mortgage of $200,000, that’s just one mortgage, and banks look at the bigger picture: a mortgage broker brings them many mortgages a year, so banks give them discounts off their rates.”
Even if you plan on staying with your current lender, Levine suggests contacting a mortgage broker to shop around on your behalf.
“Mortgage brokers work with at least a dozen lenders and can scour the market and let homeowners know if their bank is giving them a good offer or not,” he explains.
What are the benefits
of bi-weekly vs monthly payments?
While you can lessen the burden of higher interest rates by extending the amortisation of your mortgage, you’ll be paying more in interest in the long-term. There are other ways to pay it off and pay less over the term of your mortgage, though. Lenders offer homeowners various payment options, such as paying monthly or bi-weekly, says Levine.
“If you’re paying bi-weekly, interest accrues for two weeks before it gets paid off and if you pay monthly, interest accrues for a month before being paid off. Paying bi-weekly doesn’t create a big savings. Depending on the size of the mortgage, the difference could be less than $10 saved per year,” he explains.
However, adding a bi-weekly accelerated payment can save tons of money. For example, if your mortgage payment is $500 every two weeks and you add another $50 as an accelerated payment, that goes straight towards your capital.
“Your initial $500 pays a portion of capital and a portion of interest. That $50 goes 100% towards capital, which pays the mortgage down faster and decreases your amortization,” says Levine.
Curious what your potential mortgage payment might be? Check out the REALTOR.ca Mortgage Calculator to see some possibilities.
So, based on the example above, if you started with a 25-year amortization and bi-weekly payments, you’re done in 25 years. An accelerated payment allows you to pay off your mortgage in roughly 21 years.
Should you go from a fixed to a variable rate?
If you’re unsure whether to take a fixed or variable interest rate for your mortgage, you’re not alone.
“Now is a very strange time in the market,” admits Levine. “Usually, a client takes a variable rate because it starts out lower than the fixed rate, but today the variable rate is over 1% more than the five-year fixed rate, so people are really in a tough spot. They’re taking the variable rate knowing they’re losing significant money now but hoping rates climb down enough to first break even and then gain back everything you lost and then some.”
Levine is seeing many homeowners taking a three-year fixed term instead of five-year and hoping to benefit from lower rates down the line. If you decide to go with a variable rate, most lenders offer a one-time free change to a fixed term if you change your mind.
Which experts should you speak to?
Don’t lock yourself into anything without first consulting your financial advisor, bank manager or mortgage broker. These professionals can help you make the best decision, says Levine.
“Speak to an expert to see if now is a good time to lock in or if you should continue to ride the variable wave,” he suggests.
As for managing your money with higher mortgage payments, your financial advisor can provide tips on saving and budgeting—especially if your family or job situation has changed.
“The cost of living has gone up, which puts a greater financial burden on people,” says Levine. “I noticed in 2020 and 2021 that people weren’t thinking forward to the future, and many were borrowing the maximum to get into their house. Now, you definitely have to budget, and set aside a buffer for anything that might come up.”
It can be daunting to navigate a mortgage renewal, but you don’t have to go it alone. Talk to a mortgage lender or let a REALTOR® point you in the right direction.
The information discussed in this article should not be taken as financial or legal advice. This article is for informational purposes only.
— REALTOR.ca